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Impact of Economic and Non-economic variables on Real Estate Sector in

Bangladesh: A study on Dhaka city

Article  in  Real Estate Economics · November 2017

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British Journal of Business Design & Education
ISSN (Print): 2222-7426, ISSN (Online): 2222-8412
Vol 10 No 02

Impact of Economic and Non-economic variables on Real Estate

Sector in Bangladesh: A study on Dhaka city
Kh Khaled Kalam
MBA in Global Financial Services
Coventry University, UK
Email: Khaledkalam135@gmail.com

Mani Maren Pandurengan

Senior Lecturer, UOW Programme
Subang Jaya, Malaysia
Email: manim.pandurengan@newinti.edu.my

Abstract
The research paper is mainly focused on to the various economic and non-economic factors to determine
the house price in Bangladesh by using multiple regression model and also applying the. All the
economic and non-economic variables secondary data were collected from World Bank and Bangladesh
Bureau of Statistics which are shown yearly basis from 1991 to 2015. The paper is also based on
different existing report, journals, data analysis and books to understand the hazardous area and then
concluded the result. The report stated the real estate present market value and the current market phase.
The framework shows the flows of the business as it also shows that lack of research in Bangladesh
perspective as the industry is neglected. Bangladesh has faced various difficulties to obtain necessary
information. This study will help all of the developers of Real Estate Business Company to identify the
situation and can also predict the future of the business. Moreover, it will also help to identify the
government influences along with various business indicators variables.

Key Words: Economic factors, Non-Economic factors, Real Estate, Bangladesh.

Introduction
The real estate and housing sector is one of the key drivers of any national economic
development and industrialization. In Bangladesh the real estate has emerged as a critical sector
of our economy. A very significant operational strategy for business is to take decision for
allocating investment. Among all the asset investment, property or real estate investment is the
most popular investment, though the lands are very insufficient resources. For continuous
income, a very popular investment plan is to invest on property or land sector. When the
property assets acquisition had been proposed, real estate investment raised its head along with
the property investment interest. Therefore, real estate investment is impacting in many
countries economy though the sector has been ignoring the level of return and risk (high risk
and high return). In order to understand the risk, techniques, asset pricing, investment and the
development of the sector, the companies, financing institute and government have no other
choice but to understand the real estate development cycle. Real Estate cycle depends on land,
planning, construction, feasibility study, selling, management and refurbishment. In Barrasian
property market cycle model, it has been seen that the market was divided into three segments
and they are property market, real economy and money economy. These segments have their
own various elements which help to complete property cycle. This property market cycle was
developed by Barras in 1983, 1994, 2005, 2009 which identifies the relationship between
general economy and the sub-market. Excessive demand for property will create shortage in
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property supply. Property market and Money market are also influenced by economic turn up.
Increasing of the property supply and decreasing of demand will also affected on rent of
property and property rising cycle will be hampered. The property cycle will show the current
situation and identify how economic recovery helps in property market.

Bangladesh real estate market is growing rapidly because of increasing land price, construction
cost, awareness of apartment living and western influences. The population of Bangladesh is
increasing significantly 2.06% but the capital city Dhaka is the highest density city around
4.2% (2014). In 2011, Dhaka contributes national urbanization around 39% which grows
around 5-6% annually (REHAB, 2004). The shortage of housing supply is increasing in all
urban areas and has reached the current demand around of 600,000 to 800,000 units all over
the country, especially in the capital of Bangladesh, which has the demand of house estimated
to be 60,000 units of real estate apartments combined with 200,000 units of replacement plus
backlogs (REHAB, 2004).

Figure 1: Urban and Rural Population Growth Trend in Bangladesh, 1950–2025.

Source: UNDESA (2011).

Twenty years ago only five companies engaged with developing real estate business which
boomed and now 2000 developers operating their business and the number of developers are
continuously growing who contributes revenue of around Tk. 2 billion a year to the government
by supplying 8,000 to 10,000 units of housing apartments. The sector is now of employees
about 2 million people, who consist of architects, engineers, management officials, direct and
indirect labors. The average contribution to GDP of this sector in the last five years was 12-
14% in 2014-15. Bangladesh Real Estate Development is depending on some Critical Factors
which has been described here to understand the situations.

Problem Statement
The Real Estate business is growing in Bangladesh day by day as Dhaka being urbanized.
Before 1985, people were not interested to buy an apartment for living, even in 1995 they were
eager to invest or buy apartment. Finally the real estate grew from 1999 to 2004 rapidly because
of huge demand of accommodation, shortage of land and rapid urbanization. Instead of rapid
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growth in real estate sector the development is not up to the mark. According to the statistics
only 40% of the people of Dhaka city get standard or below standard housing facilities which
will not fulfill the demand of accommodation facilities. To identify the problem and the phase
in real estate cycle the real estate companies have to do a lot of research for better opportunity.
Though there are many researchers already have done their research on it. But there is not
sufficient research data on Bangladesh. Barua, Mridh and Khan (2010) conducted a research
on “Housing Real Estate Sector in Bangladesh Present Status and Policies Implications” which
helps to understand the present situations of property market phase in Bangladesh. According
to the research most of the population are segmented into two parts as middle and low income
groups and are providing accommodation for all of them in an affordable price is a delusion in
Bangladesh. The private real estate companies are working to provide the accommodation but
they only met a small portion against huge national housing demand. Real estate companies
could meet the huge demand if they can get easier financing availability as there is a positive
support of various indicators as increasing house rent, inadequate and costly land. So it is very
important to understand which economic and non-economic variables are impacting on House
price in Bangladesh and what the reason is behind.

Literature Review
Sabina Andreea Cazan (2014) has done an analysis on real estate market development, where
Sabina Andreea Cazan (2014) wants to create a view on England Real Estate market, and its
functionality and identifying the key factors of real estate which will lead to the growth of the
housing prices. To understand the development of property market the author showed strong
connection between banking system (Loan, Interest Rate, and Mortgage), the regulations from
the field of constructions, the economic environment and the development of the country. The
economic environment of England becoming more favorable day by day for the investors and
consumers. The real estate market of England is now situated in recovery phase as the
movement of government is encouraging, the prices are rising and the mortgage applications
are increasing day by day. Another research by Bojan Grum and Darja Kobe Govekar (2015)
has focused on macroeconomics factors which have a significant relation with the property
prices. The article mentioned about some macroeconomics variables like the unemployment
rate, the current account of the country stock index, gross domestic product and industrial
production which have correlation with the property price in different nations. The report
mainly identifies in Slovenia, Greece, France, Poland and Norway which factors are affecting
the most and what is the development phase. In the article it shows that the only price of
residential real estate is linked with unemployment in France, Greece, Norway and Poland as
the other variable which are included in the model are not claimed to be related to the price of
residential real estate. On the other hand, in Slovenia, only the price index has statistically
significant relationship with price of residential real estate. However researchers believe that
rest of the variables are also essential for depth explanation, prediction and forecasting of the
behavior of the real estate market, that is very much important especially for investors (buyers,
investors), creditors (banks) and spatial planners (analysis of the most economic use of space).
Another developed country Sweden also examined the macroeconomic effect of house price
by Peter Gustafsson, Pär Stockhammar and Pär Österholmin 2015 considering a quantitative
assessment of the macroeconomic factors which are World GDP, Unemployment, Real housing
prices, Financial index, High yield bond spread, Household consumption, Mortgage rate that
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effects for declining the house price which showed that household consumption and
unemployment have impacted on the dropping housing because of the global recession.

Beside the develop countries some developing country like India have the most prominent
future in real estate development. Increasing business opportunities and emerging labor
migration makes tremendous rising of housing demand in India mentioned by Neha Verma
Madan, Rahul Shukla (2015) that the real estate sector in India is growing at an incredible rate
of 30% per year which is now worth about USD15 billion. This sector is attracting investments,
especially to FDI (Foreign Direct Investment) because real estate market is contributing a large
share to the India’s GDP. In this research the author analysed various property segments, the
challenges and opportunities faced by the real estate and its prospects. They also identify the
different real estate development phase, some important legislative issues of government and
demand and mentioned that in real estate development sector as the unreliability is booming
over the developed and developing nations. India is still struggling to regain their growth
momentum and expecting to grow in a reasonably high rate. The opportunities of emerging
India market will attract more investors which will help the industry to be more transparent,
mature and helps to adopt more advanced construction craftsmanship. However, in 2015,
another researcher stated that not only investment and opportunities will be shown the actual
figure of real estate development but also have to understand the demand drivers. According
to the study before investing, new investors have to understand clearly and identify the
regulatory environment, existing opportunities, and the market players as now India have the
opacity of the market, rampant speculation, procedural and infrastructural deficiencies. The
study was based on secondary data of different drivers like Different Property, Hospitality,
FDI, REIT, Transparency and Regulations.

Housing price could be determined by the economics variable which explained in most of the
cases. A brief case study has been conducted regarding the housing price. Gholamreza Zandi,
Mahadevan A/L Supramaniam, Ayesha Aslam and Lai Kin Theng (2015) have investigated the
important economic factors which are affecting on Malaysia property pricing. The study has
been concentrated only on a specific state of Malaysia, Penang (The Economical Factors
Affecting Residential Property Price: The Case of Penang Island). The research was briefly
studied and focused on Inflation Rate(INF Rate), Gross Domestic Product Rate (GDP Rate),
Gross National Income Rate(GNI Rate) and Basic Lending Rate (BLR), and Base Rate (BR).
It was an expletory research which was aimed to determine the relationship exists between the
housing price and the economic variables. The finding explained that the factor Base Lending
Rate (BLR) and Gross Domestic Product (GDP) are the strongest factors which affect the
property prices most in Penang state. According to the author recommendation the result for
BLR is unpredictable which might occur regarding sluggard effect towards housing price could
be lower after a few years later BLR will take adjustment. The study suggests also to analyse
the PESTEL which political factors, social factors, technology factors, legal factors and
environmental factors.

Suborna Barua, Ali Haider Al Mamun Mridha and Rezwanul Huque Khan (2010) indicate a
very promising and also positive growth of real estate market (Housing Real Estate Sector in
Bangladesh Present Status and Policies Implications) by the analyzing of Rise in house rent,
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increasing demand for housing, getting easy financing facility, rapid urbanization and
inadequacy of land. The study was based on theoretical and practical studies which indicate
also expletory research method. The data was collected through face-to-face and telephone
interview. The study has found that the industry has to satisfy the increasing housing demand
and also has to try minimizing supply gap in Bangladesh. To clarify the judgment, another
research (Housing demand and housing policy in urban Bangladesh) by Sohail Ahmad has
done in 2014. He stated that in respect of income and price the housing demand is inelastic
Continuous demand for housing attributes which showed that owner and renter households
value structural quality. Squatter household’s value living space, water supply and electricity,
but place less emphasis on structural quality. The study has focused and set a model for housing
demand, housing supply and market equilibrium. Demand of housing basically depends on the
price of the dwelling and demographic characteristics of the household, including household’s
income.

Methodology
The study is based on descriptive and quantitative research. The study has examined the
relation between the dependent variable House price in Bangladesh and independent variables
which are considered as GDP, Inflation, Urban Population, Interest rate, labor force in
Bangladesh. The study area is based on development of real estate sector in Dhaka as most of
the developer’s activity focuses on the capital of the country which causes rapid urbanization.
Also the study has examined the annual times series data from the year 1991 to 2015 for 25
years of observation. This report focused on the secondary data which is based on property
Annual report, various Article on property cycle, Journal and various books.

Hypothesis of the Study

H1: β1 ≠ 0 There is a positive relationship between Inflation rate and House Price in
Bangladesh.
H1: β2 ≠ 0 There is a relationship between Urban Population and House Price in Bangladesh.
H1: β3 ≠ 0 There is a positive relationship between GDP and House Price in Bangladesh.
H1: β4 ≠ 0 There is a relationship between Labor Force and House Price in Bangladesh.
H1: β5 ≠ 0 There is a relationship between Interest rate and House Price in Bangladesh.

Multiple Linear Regressions

Instead of simple linear regression model the study consider multiple linear regressions model
because the research is not depend on one independent variable influences .Thus, multiple
linear regressions model is used to ensure that the estimated result does not divert from the
actual results. There are six variables have been considered in the estimated model and
economic model will be formed as

HP= β0 + β1INF + β2UP + β3GDP + β4LF + β5IR

In this equation HP stand house price in Bangladesh, β is the coefficients which indicates the
effects on HP. Here β1= INF will be the inflation rate of Bangladesh, β2=UP is the urban
population rate of Bangladesh, β3=GDP will be the market size,β4=LF indicates Labor force
and lastly β5=IR indicates the interest rate of Bangladesh.
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Stationarity test – Time-series and Correlogram

A stationary time arrangement would ordinarily be made on the supposition that the factual
properties of the factors would be accepted to be the same later on as the past. The direct of the
stationarity test is acquiring a significant example insights alongside different factors as the
portrayal of such measurements later on might be valuable if the arrangement is stationary
(Shalit 2012). The vast majority business and financial time arrangement that are made
accessible need aid as a rule a wide margin starting with stationary. The formal test including
time-arrangement plot would investigate the patterns and diagram developments nearby its
reference to the three classifications: test without consistent, test with steady and test with
steady and pattern. The casual technique including the correlogram would investigate the
downwards pattern of the diagram and graph by signifying any decay to the zero value or below
negative values, in order to satisfy for stationarity.

Augmented-Dickey Fuller (ADF) Test

In the ADF test, the trial of the null hypothesis of a unit root displayed in a period arrangement
test as the option theory would more often than not be stationary relying upon which adaptation
of test did.

Ordinary Least Square

Linear least square used to evaluate the obscure parameters in a multi relapse demonstrate by
means of limiting the aggregate of the squares of contrasts between the adjusted information
and those created by the direct capacity of an arrangement of logical factors (York 2012). The
outcome would can be communicated in a few structures which in this perspective the different
relapse show. The p-value would be generally used to decide the importance of the individual
factors however to a specific degree depending of cases (Weber and Monarchi 2008).

Data Analysis
Time series plot
According to the Figure it will be stated that the variables based on the time series plot can be
identified as the category of Constant with trend.

Table 1: Time Series Plot for Inflation, Urban Population, Labor Force, GDP and Lending
Interest.
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It is showing that there is a significant trend with the observation of the variables tremendously
from 2010 to 2015 in time series plot. Here the time series plot categorized as X1, X2, X3, X4,
and X5 is the constant with trend which have a relation to the presence of an intercept on the
vertical axis beside the attended of the trend.

Correlogram Plot

Table 2: Correlogram Plot for Inflation, Urban Population, Labor Force, GDP and Lending
Interest.

Based on the Figure 2 the Correlogram test ACF to Inflation, Urban Population, Labor Force,
GDP and Lending Interest. It showed that the stationarity for inflation cannot be claimed on
this variable at level data downwards trend in the beginning of the Correlogram which indicates
the variable is declining to zero level. The variables continued a trend downwards after beyond
the zero value in the end. The figure shows that there are some frequent moves over the ten
lags. Urban population GDP and Labor force variables continued a trend downwards after
beyond the zero value in the end. The figure shows that there are some frequent moves over
the ten lags.
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Augmented-Dickey Fuller (ADF)

To understand that the data is stationary or not stationary Augmented Dickey-Fuller (ADF) test
will be needed to analyse. Augmented Dickey-Fuller (ADF) test have three categories without
constant, with constant, with constant and trend which can be denoted as stationary if the P
value shows as below 0.05 (5% significance level).
Variable P-value
Without constant With constant With constant & trend
House price (Y) 0.008479 0.02657 0.008512
Inflation (X1) 0.007055 0.02282 0.006332
Urban Population (X2) 0.008626 0.008911 0.008591
GDP per capita (X3) 0.06943 0.03267 0.001432
Labor Force (X4) 0.005278 0.03864 0.05193
Lending Interest (X5) 0.04422 0.02312 0.06781

Table 3: Augmented-Dickey Fuller Test Result (Without constant, with constant and with
constant & trend)

Without constant: Based on the table, the ADF test result indicate that there are 4 stationary
variables which is X1,X2,X4,X5 so the null hypothesis are rejected and 1 non stationary
variable which is X3 so the null hypothesis is non rejected.

With constant: Based on the table, the ADF test result indicate that there are 5stationary
variables which is X1,X2,X3,X4,X5 so the null hypothesis are rejected

With constant & trend: Based on the table, the ADF test result indicate that there are 3
stationary variables which is X1,X2,X3 so the null hypothesis is rejected and 2 non stationary
variable which is X4 and X5 so the null hypothesis is not rejected.

Correlation Matrix
To understand the furthermore relation between the effects of independent variables correlation
matrix have been used. Correlation matrix would be used to measure the existence of
relationship between the independent variables via a range of values against the standard
average.

Urban GDP per Lending

Independent Variables Inflation Labor Force
Population Capita Interest

Inflation (X1) 1.000

Urban Population (X2) 0.1418 1.000
GDP per capita (X3) 0..5282 0.4145 1.000
Labor Force (X4) -0.4442 -0.2278 -0.5619 1.000
Lending Interest (X5) 0.0419 -0.1741 0.2663 -0.3486 1.000
Table 4: Correlation Matrix Result
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Multicollinearity
To determining the multicollinearity this research paper follow the correlation coefficient
method. The test will conduct if there is a multicollinearity present in the correlation coefficient
if it will be more than 0.8/80%. In the test table 2 it shows that there is no multicollinearity and
all the variable is under 0.8/80%.

Standard p-
Variable Coefficient t-ratio
Error value
β 0.379828 .221712 1.713 0.1039
Inflation 0.00511015 0.0371379 0.1376 0.8921
(X1)
Urban -0.0603987 0.0206448 -2.926 0.0090
Population
(X2)
GDP per 0.106995 0.0586407 1.825 0.0847
capita
(X3)
Labor -16.2957 7.90253 -2.062 0.0539
Force
(X4)
Lending -0.753384 0.286252 -2.632 0.0169
Rest (X5)

R-squared 0.509526
Adjusted R- 0.373283
squared
P-Value(F) 0.016955
Table 3: Ordinary Least Square Test

Table 3 Represents the summery of all variables of this study .Total observation of this study
were 24. I have used two tail test so that my significance level (α) is 5% or .05 for regression
analysis. By using this significance level it can test the independent variable more specifically
for testing hypothesis.

R-squared: In the regression analysis R-squared is 50%. It shows that 50% of all independent
variable together explain dependent variable.

Adjusted R-squared: The adjusted R2 tells you the percentage of variation explained by only
the independent variables that actually affect the dependent variable. According to the study,
adjusted r squared is 0.373283.

P value: P value is compared with the significance value. If the P value is less than the
significance level that means the null hypothesis is rejected .If P Value is greater than or equal
to the significance level that means the null hypothesis is not rejected.
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Variables Significant Level

Inflation (X1) Insignificant
Urban Population (X2) Significant at 1%
GDP per Capita (X3) Significant at 10%
Labor Force (X4) Significant at 10%
Lending Interest (X5) Significant at 5%

Table: 4 Summary of the Significant Level

Multiple Regression Model

Y=f (d_l_House Price, l_Inflation, l_Urban Population, l_GDP per capita,
d_l_Lebor Force, d_l_Lending Interest Rate,)

𝑌 = 𝛽0 + 𝛽1𝑋1 + 𝛽2𝑋2 + 𝛽3𝑋3 + 𝛽4𝑋4 + 𝛽5𝑋5

Y=0.379828+0.00511015X1+ -0.0603987X2 + 0.106995 X3 + -16.2957 + -

0.753384X4

Y= d_l_House Price=0.379828 + 0.00511015 l_Inflation + -0.0603987 l_Urban

Population + 0.106995 l_GDP per capita + -16.2957 d_l_Lebor Force + -0.753384
d_l_Lending Interest Rate

Findings
In this study GDP per capita denoted as an annual percentage growth rate of GDP per capita
which is based on constant local currency. To measure GDP per capita is gross domestic
product divided by midyear population. The testing for hypothesis indicates that GDP Per
Capita is significant and also has been positively affecting Bangladesh Housing Price at a
significant level of 0.1. The research proves that house price will increase at a level if the gross
domestic product increases. A study on Bangladesh housing price increasing factors by
Suborna Barua, Ali Haider Al Mamun Mridha and Rezwanul Huque Khan (2010) who stated
that increasing gross domestic product per capita growth will indicate of increasing of housing
price as the country have a large number of population. The increasing population will help to
increase the national gross domestic product which indicates the probability of future growth
for real estate industry sector in Bangladesh.

Inflation as measured by the consumer price index reflects the annual percentage change in the
cost to the average consumer of acquiring a basket of goods and services that may be fixed or
changed at specified intervals, such as yearly. In the study, it shows that there is no significant
relationship of inflation with the house pricing in Bangladesh. In the past research paper by
Gholamreza Zandi, Mahadevan A/L Supramaniam, Ayesha Aslam and Lai Kin Theng (2015)
mentioned that there is no correlation between inflation and housing price. Though more
foreign firms are attracting and willing to invest to the host country for the increased expected
level of profitability but inflation is not the factor to increase the housing price.

Urban population refers to people living in urban areas as calculated the projected average rate
of change of the size of the urban population over the given period of time. Total present urban
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population subtract past total urban population divided by present or past value. In the Data
analysis it indicates that urban population has a significant relation of 0.01 level but still have
negative effect of Bangladesh Housing Price. The increasing housing price shows that rich
people of Bangladesh are spending millions for buying the house. Half of the people of urban
population live in the poorer rural areas and migrant to the city for job will not be interested to
buy houses in the city area. As these people sharing the small dormitory placement in a long-
term that will make a huge gap of living condition. Therefore, most of the rich people buy the
house to give rent for the migrant people that make the house demand remain the same. Beside
that the lower income level is another obstacles for the people to buy house in the city. Clara
H. Mulder (2006) stated that decreasing of urban population there is not too much room for
using housing price policy to steer migrants. Housing price can be used to attract internal
migrants or to prevent the resident population from moving out.

Total labor force comprises people aged 15 and older people who supply labor for the
production of goods and services during a specified period. The testing for hypothesis indicates
that Labor Force is significant and also has been negatively affecting Bangladesh Housing Price
at a significant level of 0.1. The labor force decreasing indicates the decreasing of labor supply
that impacts on increasing cost of construction. As there is no government rules for estimation
of housing price in Bangladesh, so that the developers are being encouraged to increase the
house price. Unviability of experienced labor supply is a challenge for the developers to hire.
So they have to invest more money to hire experienced labor force and also ensure International
Labor Organisation (ILO) rules for safety features of the labor. House price have an effect on
labor supply. If the labor supply decrease at a level then the cost of the construction will be
higher as deficiency of young married / co-habiting man and women and also the experience
one (Richard Disney and John Gathergood).

It is denoted that the Lending rate is the bank rate that usually meets the short- and medium-
term financing needs of the private sector. This rate is normally differentiated according to
creditworthiness of borrowers and objectives of financing. The hypothesis testing shows that
the lending interest rate has a significant relation of 0.05 level but still have negative effect of
Bangladesh Housing Price. The lower interest rate may lower the consumer loan interest rate
which will increase the purchasing power. So the demand for property or house will increase
high. Hubbard (2006) indicates that the lower interest rates benefit the borrowers who could
refinance existing mortgages at lower rates and new buyers are continuously encouraged to
purchase housing which will increase the price of the house as over demand.

Conclusion
The main objective of this research paper is to identify the Economic and Non-Economic
factors affecting House Price in Bangladesh mainly in Dhaka city. The research will be helpful
to the Bangladesh Government. Real Estate & Housing Association of Bangladesh (REHAB)
and Rajdhani Unnayan Kartripakkha (RAJUK) to understand the problem of the real estate
industry and also helps to determining the ways to attract more investor to invest in real estate
as the house price and house demand is increasing day by day. Also this paper will help the
businessman and the investor to take decision on either invest or expanding the market.
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 British Journal of Business Design & Education
ISSN (Print): 2222-7426, ISSN (Online): 2222-8412
Vol 10 No 02

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