Bring down Property Prices, says Governor Rajan

Bring down property prices, says Governor Rajan

He is perhaps the only governor of the Reserve Bank of India with the looks of a rock-star. Flamboyant and fearless, he is today known amongst school kids as well, given the way he makes his presence felt. The IIT-IIM alumnus, Raghuram Rajan, who had the audience eating from his hands, with his dosanomics that gave a new spin to economics has something to say about realty prices.
In the last 18-months the RBI has lowered interest rates by 150 basis points and it today sits at 6.5 percent. This drop is to encourage consumers to purchase homes and revive the falling real estate sector.
Earlier, Rajan had asked realty developers to bring down prices instead of piling up inventory. With property prices soaring up, the demand is trailing supply. People will get to invest if prices stabilise.
On their part real estate developers have asked for reducing the interest rate on home loans to encourage real estate business grow to which the governor responded saying he does not want to inflate the property prices by a cut in the interest rate of home loans. In vintage Rajan-style, he crunched the discussion with numbers. As of June 2015, home loans disposed of grew by 15.6 percent to Rs.6, 53,400 crores as against the previous year when it by 17.1 percent to Rs 5,65,000 crores. In contrast, the overall lending by banks grew by 12.8 percent in June 2014 and 7.3 percent in June 2015. His argument: the overall credit growth crashed with a brisk increase in home loans.
He further added that home loans given amount to 12.7 percent and 12.2 percent of the total loans in 2014 and 2013 respectively. The increase in home loans has not lead to a decrease in the stock of unsold homes. This shows that the growth in property prices plays the dominant role in unsold home stock.
Rajan sternly believes the central bank can identify a bubble while his US counterpart Alan Greenspan held bubbles are perceptible only after the fact. Rajan says the surging property prices are a bubble, and it needs to fall for the people to buy homes.
Knight Frank India, a real estate consultancy firm, argue that developers cannot drop down prices since the input costs, including the cost of land, have gone up significantly.

Recently Rajan again appealed to real estate developers to adjust property prices. He stressed there should be more transparency on land acquisition, construction, and sales, adding the building of houses and roads is a sign of growth for a developing economy like India.
Rajan cautioned that while there is a difference in how market and developer view the prices, it the situation continues, the real estate sector will be in a holy mess, as buyers will stay away, and sellers will pile stocks. Hence, the best solution will be to reduce the home prices for the market to function. QED.

Time to focus on Rental Housing

Harvard researchers predict that over the next ten years, India can become the world’s fastest growing economy. The real estate sector, the highest job-creating sector after agriculture, has a significant role to play. The government can chip in with the role of an enabler.
Alas, it hasn’t worked that way.
Poorly formulated housing policies can trigger an economic and financial crisis. So, what we need are good policies to support growth in long-term living standards and strengthen macroeconomic stability. Here are a few things the government can do.
The government should intervene in housing markets to ensure equitable access to housing. These interventions could include fiscal measures such as taxes and subsidies, the direct provision of social housing, and various regulations influencing the quantity, quality, and price of houses.
These policies will impact the overall economic performance and living standards, in that they can influence how households use their savings as well as residential and labour mobility which is crucial for reallocating workers to new jobs and geographical areas.
Remember, adequately supervised financial and mortgage market development, combined with policies that enhance housing-supply flexibility, are key for macroeconomic stability.
In a country like India where there is continuous growing population, there is tremendous pressure on the housing markets. The rental property market is the only available option for most people who migrate into a city either for employment or for nurturing their careers.
There is always a demand for rental housing regardless of how the home sales market is performing. This is because rental housing has a positive impact on the development of a city.
Focus on infrastructure and land acquisition
Infrastructure in many Indian cities is inadequate to meet the growing needs of its population. Many people do not move into houses they bought because of lack of amenities like shopping markets, good roads, hospitals, etc. in that area. If there is greater investment in infrastructure in areas that need such facilities, it will lead to opening up of more of the urban landscape for development. This will make housing less expensive, and more people will be able to live away from their employment centres.
But, constraints in the Land Acquisition Act has made things difficult. Thereby real estate development has become expensive. Developers getting entangled in legal battles over land is par for the course. Historically, the world over, when construction becomes expensive, people begin to live in informal settlements aka slums. Data show that nearly 17 percent of India’s population live in slums.
When the title to property is not clear, you don’t have an incentive to invest in improving the housing standards. It also freezes valuable urban land. If the government can legalise these settlements, the informal economy could be brought under the ambit of formal law. This will lead to redevelopment of many households. Here affordable housing could act as a preventive for such unorganized growth.
Innovations in mortgage markets should be coupled with appropriate regulatory oversight and prudent banking regulations. This would increase access to credit and lower the cost of housing finance.
Eleven percent of the entire housing stock is in the rental market. Since 1961, the fraction of the houses in the rental market had declined by over 70 percent in cities like Mumbai. The reason was that rent controls were not eased while allowing for the development of buildings by raising the floor space index (FSI). As most households with low-income levels cannot afford to buy houses, the function of the rental housing market is of great importance. FSI is an important factor in the housing market. Restrictions in this regard prevent redevelopment of old buildings.
Another interesting fact is that rental properties come with variation in budget sizes. The higher one’s budget was, there was scope to get a better place regarding location or size, accompanied with amenities. These ranged from single family homes to high-end multi-bedroom apartments. Rental housing catered to a whole spectrum of income groups.
Developing cities see migration from the hinterlands. We must develop the suburbs and surrounding spaces to meet this demand. This ensures that the wheels of the economy are sufficiently oiled and pulled by the cogwheels called rental housing. Otherwise, we would be staring at a major man-made crisis.

Real Estate Taxation

Gains or Losses that arise from the sale of any capital asset like property, shares, securities, gold etc are subject to capital gains tax under the provisions of the Income-tax Act. No implication on purchase of property under Income tax.

Overview of taxation on sale of property

Gains or Losses that arise from the sale of any capital asset such as property, shares, securities, gold, etc. are subject to capital gains tax under the provisions of the Income-tax Act. There are no implications in the Income-tax Act upon purchase of a property.

Nature of capital gains

If the property is held for 36 months or less, the resultant gain is called Short-term Capital gains. If the property is held for more than 36 months, the gain is referred to as long-term capital gain. The short-term capital gain is taxed at the normal rate of tax (i.e., at slab rates for individuals and 30% for companies) while the long term is taxed at 20%, subject to certain conditions.

Let’s now look at how to compute capital gains.

Computation of Capital Gains

The basic format for the calculation of capital gains is laid out in Table 1.

Real Estate Bill

Is this one finally for real?

If you have been one of those teeming millions taken for a ride by builders, here is some hope.

The Real Estate Act, 2016 has been passed by the two houses of parliament and received presidential assent. That it should have taken so many years since it was first introduced in parliament is a tad sad, but “it’s better late than never.”

The Act is welcome because it protects buyers by offering them TEA: transparency, efficiency and accountability in the execution of real estate projects. No one is saying that promoters are crooks but there have been rank inefficiencies even amongst the best of them, and there were no sufficient distress redressal mechanisms.

Here are TWELVE important things that you should know about the new Act.

1. Real Estate Regulatory Authority

If you have a grouse, you can lodge your complaints with the proposed “Real Estate Regulatory Authority (RERA).” This body will be set up within one year from the date of commencement of this Act. Until then there will be a stand-by body.

2 Registration

  1. Every promoter has to register his project, whether residential or commercial, with RERA before booking, selling or offering apartments for sale.

  2. In respect of projects ongoing on the date of commencement of the Act, and which have not received a completion certificate, the promoter shall apply for registration within three months of the start of the Act.

  3. The following projects do not require registration:

  1. Where the land area to be promoted does not exceed 500 square meters or the number of apartments to be constructed does not exceed eight apartments.

  2. Projects where the completion certificate has been received before the commencement of the Act;

This is the first step towards building Accountability.

3 Carpet Area

A marked departure from the past is that developers can sell units only on carpet area. This would essentially mean that the quote will be per unit of carpet area.

Carpet area is the net usable floor area of an apartment. This excludes the area covered by the external walls and common area. Typically in high-rise buildings, 30% of the area is the common area. Thus, if you are buying a property of 2000 square feet at say Rs 7500 per square feet, you will be paying Rs 150 lac. But in reality, you would be paying that amount for about 1700 square feet of livable area, which translates to Rs 8823/-. Yes, this does not mean much to the buyer, but it, at least, gives him the true cost of purchase.

This is a clear step towards Transparency.

4 Separate bank account

  1. The promoter will have to deposit 70% of the amount received from buyers in a separate bank account. This money will have to be used only towards the cost of land and construction of this specific project.

  2. The promoter can withdraw the money in proportion to the percentage of completion of the project. Such drawings can be made only after a CA certifies that the withdrawal is in proportion to the percentage of completion of the project.

  3. The promoter must get his accounts audited by a CA within six months of the closure of the financial year.

This is a step towards efficiency.

5 Acceptance of registration

  1. RERA shall within 30 days, grant or reject the registration, failing which the project shall be deemed to be registered.

  2. Upon granting a registration, the promoter will be provided with a registration number, including a login Id and password for accessing the website of RERA and to create his web page and to fill in complete details of the project.

This is a step towards efficiency.

6. Website of RERA

The promoter shall, upon receiving his login Id and password, create his web page on the Internet site of the Regulatory Authority and enter all details of the proposed project including providing quarterly updates on the status of the project.

This is a step towards transparency.

7. Revocation or lapse of registration

RERA can revoke registration if the promoter defaults in doing anything required under the Act. If the registration is canceled or it lapses, RERA shall:

  1. Debar the promoter from accessing the website about the project.

  2. Specify his name in the list of defaulters on its internet site.

  3. Inform other Regulatory Authorities in other States and Union territories about such cancellation.

  4. Facilitate the remaining development works to be carried out by competent authority.

  5. Direct the bank holding the project bank account, to freeze the account.

This is a step towards accountability.

8 Marketing by the promoter

  1. The advertisement or prospectus published by the promoter should prominently mention the website address of the RERA.

  2. Where any person makes an advance on the basis of the information contained in the advertisement or prospectus and sustains any loss because of any incorrect statement included in these, he shall be suitably compensated by the promoter.

This is a step towards accountability.

9 Maximum advance payment

A promoter shall not accept a sum more than 10% percent of the cost of the apartment or building, as advance payment or application fee, from a person without first entering into a written agreement of sale with such person and register the said agreement of sale.

This is a step towards efficiency.

10 Alteration in the plans

  1. The promoter cannot add or alter the approved and sanctioned plans, without the previous written consent of at least two-thirds of the allottees.

  2. The promoter shall make good without any further charge any defect in workmanship or obligations brought to his notice at any point within a period of five years from the date of handing over possession.

    This is a step towards efficiency.

11. Delay in handing over possession

If the promoter is unable to hand over possession to the allottee in accordance with the terms of the agreement, he shall on demand being made by the allottee, to return the amount received by him from the allottee with interest and compensation at the rate and manner as provided under the Act.

This is a step towards accountability.

12. Other provisions

  1. The same rate of interest will be payable by the allottee and the promoter in the event of their respective defaults.

  2. After the promoter executes an agreement for sale no charge can be created by the promoter on such property.

  3. The promoter shall insure the land and building and construction of the project and pay the necessary premium.

  4. The promoter shall compensate the allottees in the case of any loss caused to him due to a defective title of the land.

  5. Allottees must take physical possession within two months of the occupancy certificate issued for the said apartment.

These provisions are likely to bring in greater transparency, efficiency and accountability in the execution of real estate projects and act as win-win for both parties. It also would inject a lot more of professionalism into the industry.