What Modi can do to bring acche din for home buyers

India-Real-Estate-Market
Vivek Kaul


People have taken the Bhartiya Janata Party’s election slogan “
acche din aane waale hain”a little too literally. I have often been asked on the social media over the past few weeks whether real estate prices will fall, now that Narendra Modi government is in power. I wish I had a definitive answer for that.
Nevertheless, there are many things that the Modi government can do so that home prices start to mirror the actual demand from people looking to buy homes to live in. Right now, a major part of home demand comes from investors and speculators looking to park their money. How can this be taken care of?
There are a number of steps that can be taken.
a) The Modi government wants to get back the black money Indians have stashed away internationally. As per data from Global Financial Integrity, this amounted to a whopping $644 billion as of 2011. While the intention to get back all this black money is certainly noble, how practical is it? Also, if the idea is to recover black money then why discriminate between those who have managed to transfer the money abroad and those who haven’t.
It will be certainly easier to recover black money that is still there in the country. Also, the amount of black money that has remained in the country is likely to be significantly more than what has left the shores. A lot of this money has been diverted into buying real estate. This link between black money and real estate needs to be broken.
Former finance minister in the budget speechhe made on February 28, 2013, said “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.” This number is totally unbelievable given that nearly 27,000 luxury cars are sold in India each year. Over and above this estimates made KPMG suggest that there around 1.25 lakh high networth individuals in India who have an investible wealth of at least a million dollars(around Rs 6 crore), and also own a house and other durables.
What this clearly tells us is that as a nation we barely pay taxes. This means we are generating a lot of black money. A large amount of this money goes into real estate, and ensures that real estate prices remain firm. This wouldn’t have been possible without the cooperation of the highly corrupt Income Tax department.
In fact, the Modi government could do some out of the box thinking like the Greek government, to recover this black money. The Greek government used Google Earth to track those who have swimming pools and then cross indexed their address with the amount of tax they are paying. Ideas along similar lines need to be come up with. The property dealers of the National Capital Region and the amount of taxes they pay, will be a good target to start with.
If real estate prices need to fall, more and more people need to be forced to report their income properly and made to be paid a tax on it.
b)One of the most well kept secrets of the Income Tax Act is that it actually encourages people to speculate in real estate.
There is no restriction on the number of homes against which you can claim a tax deduction on the interest paid on the home loan to fund the property. Only one of these properties needs to categorized as a self-occupied property. On this self-occupied property, an interest of up to Rs 1.5 lakh can be claimed as a tax deduction.
But this limit does not apply to the remaining homes that an individual may choose to buy. Any amount of interest paid on home loans can be claimed as a deduction as long as a “notional rent” is added to the income. We all know that these days “rents” are relatively low in comparison to the EMIs that need to be paid in order to repay the home loan. Hence, the interest component tends to be massive during the initial years and helps people with two or more homes, claim huge tax deductions.
This “loophole” has been used effectively by well paid corporate employees to bring down their taxable income over the years. People who use this deduction are more interested in claiming the deduction than actually making money from an increase in price. Hence, they are likely not to sell, even in a scenario where prices may be falling.
While offering a tax deduction on a self occupied property makes some sense, there is no logic to offering a tax deduction on a home, one is not living in. This “loophole” needs to be plugged immediately.
c) The Modi government needs to work towards building a credible real estate index. Currently, there is no way of figuring out which way the real estate market is heading. Are prices rising? Are they flat? Or are they falling? These are important questions for anyone looking to buy a home to live in. Brokers will always tell you that prices are going up. Real estate consultants bring out reports on home prices, now and then. But given that they make their money from real estate companies, these reports needed to treated with a pinch of salt.
The National Housing Bank does have a real estate index. But not many people know about it. Also, it is a quarterly index, and by the time the data actually comes out, it is not of much use.
As of now the datafor up to December 2013 is available. But we are already in June 2014. The government needs to look at building an index along the lines of the Case-Shiller real estate indices in the United States. This will not lead to results immediately but will really help over a long term.
d) In the short term the government needs to look at the real estate lending of banks closely. Most recent data released by the Reserve Bank of India shows that between April 19, 2013 and April 18, 2014, the overall bank lending grew by 13.9%. During the same period the lending to commercial real estate grew by a significantly higher 19.8%.
This, in an environment where real estate companies have huge inventories. So, why are banks lending money to real estate companies? And what are real estate companies doing with that money? One possible explanation is that banks have been giving fresh loans to real estate companies so that the companies can repay their old loans. This has allowed real estate companies to not cut prices on their unsold inventory and ensure that prices do not fall.
This is something that needs to be looked into closely.
e) These days more and more real estate companies seem to be interested in launching new projects, rather than delivering the homes that they have already sold to the consumer. Companies use the money they raise for new projects to pay off interest on debt as well as repay debt that they have taken on over the years. Hence, there is no money left to build homes.
In this situation, the only way left for the company to raise more money to build homes is by launching newer projects. The money raised for one project is used to pay off interest on outstanding debt as well repay debt that is maturing. In order to build homes promised under the project, another project needs to be launched. This leads to the first project being delayed. To build homes promised under the second project a third project needs to be launched.
And so the cycle continues. In order break this cycle, the idea of a real estate regulator had been proposed a while back. That does not seem to have gone anywhere. It needs to be re-considered, even though it may not lead to immediate results.
If these steps are taken in the days to come, there might be some relief for people looking to buy homes to live in.

The article originally appeared on www.FirstBiz.com on June 13, 2014 

(Vivek Kaul is a writer. He can be reached at vivek.kaul@gmail.com

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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