SO FAR SO GOOD, BUT WHAT’S NEXT?
More needs to be done to improve buyer access to affordable housing
Three developments in the past one month have the potential to bring a paradigm shift in the housing sector.
First, th e Re a l Es t a t e (Regulation and Development) Act, 2016, came into effect, then the Prohibition of Benami Property Transactions Act was implemented after 30 years of existence, and then came the most dramatic policy to discontinue R500 and R1,000 denomination notes.
What it means?
The real estate regulatory act is expected to bring much-needed transparency in the sector. The act aims to make the builder accountable to the home buyer, and create a level-playing field between the two. The setting up of the Real Estate Regulatory Authority as the apex body in states for enforcing transparency and accountability in the sector is expected to boost demand in the sector. It is expected to bring consolidation in the sector with only professional builders staying in the field. The problem of illegal colonies will also be checked.
The rules for prohibiting benami transaction are likely to cut speculative trading and hoarding of supply. This will help bring down home prices.
The demonetisation policy has the most immediate impact on the housing sector. The end of the ‘cash’ or the black money component of realty deals translates directly into price cuts. Already, different locations in the region have registered 20% to 30% drop in prices, and even sales have registered a downfall.
All these developments augur well for the sector, particularly for the buyer of budget and affordable housing.
These steps are aimed at improving realty dynamics in favour of the end-user and making housing cheaper. But a lot more needs to be done in the sector.
Saving time : Developers have to take multiple approvals from multiple government agencies both at the central and state government levels. There are frequent changes in government policies, requiring developers to re-seek permissions and approvals. “All this adds to the cost and time overruns of the projects. Ultimately, the end-user ends up paying both in terms of increased costs and delayed or incomplete possessions. The central and state governments must bring in reforms to make the single-window approval systems more effective and timebound. So far little or no action has been forthcoming on these aspects,” says Ramesh Negi, 66, a Panchkula-based real estate expert. In addition to multiple approvals, there are a plethora of laws, rules and regulation, which both the buyer and the seller have to comply with. These should be streamlined. Easing financial burden : Like approvals, there are multiple taxes, fees and levies on the realty sector, direct and indirect. All these costs such as external and internal development charges, stamp duty on registration of property, service tax, etc are passed on to the buyer. There is a case for not only rationalising these taxes and fees but also to reduce the rates of different taxes to make housing more accessible and affordable to all.
“High external development charges (EDC) stipulated by the state gover nment, collected by the developer from the buyer and then passed on to the government needs to be reduced,” says RP Malhotra, 68, a Panchkula-based real estate expert and builder.
In addition to the above taxes mainly imposed on the developer, and ultimately paid by the buyer; the buyer also has to pay multiple charges and fees to the developer, included in the cost of the house. These additional or hidden costs may comprise 20% to 25% of the basic price of the house. Some of these costs include preferential location charges (PLC), external development charge (EDC), internal development charge (IDC), club charges, IFMS (interestfree maintenance security) deposit, power-backup charges, maintenance charges, advance annual maintenance charges, legal expenses, water connection charges, sewer connection charges, electrical connection charges, stamp duty plus registration charges plus IDC cess, service tax on property, valueadded tax (VAT), and service tax on PLC.
Another financial burden on the home buyer is the stamp duty to be paid on the registration of properties. The rates are as high as 10% in some locations. This not only encourage underreporting of the price but also adding to the cost for the home buyer. “There is a strong case for the government to reduce the stamp duty rates, particularly after the end of ‘cash’ component of the realty deals,” says Malhotra.
Clarity over the goods and services tax (GST) is needed. “While the GST structure has been announced, the real estate industry is waiting to see which tax rate is applied to the construction industry. A higher rate
of 18% could end up increasing the cost of homes, especially in projects under construction. Clarification will be needed on whether credit for input tax will be allowed by the government if the composition scheme has been availed by developers. Only after these clarifications have been issued in coming days will the real estate industry understand the implications of the GST regime. On the positive side, there will be reduction in the tax management expenses incurred by developers thanks to the single unified tax. The compliance costs would also go down,” says Anuj Puri, chairman and country head - JLL India. Stamp duty is outside the GST purview.
Cheaper credit : The higher cost of credit for both the developer and home buyer adds to the total cost of a house, which is ultimately borne by the buyer. It also restrains the expansion of housing capacity and supply. After demonetization, banks are flush with funds but a cut in home loan interest rates isn’t expected in the short term. In the medium and long terms, the interest rates have to come down otherwise the low liquidity in the market would keep the buyer demand low and affect the expansion of new supply, say realty experts.
Home prices are expected to come down in the wake of demonetisation and ban on the benami transactions. But the new GST regime and builder trying to fulfil the conditions of the RERA Act might add to the final cost borne by the home buyer. What will be the net decline in prices will only be known in the next few months. But if the government following its recent initiative also streamlines and shortens the approval process, reduces the over-all tax burden on the buyer, and makes home loan cheaper then it will boost not only the buyer demand but also fuel the growth in the sector.
Realty is the second largest employer after the agriculture sector in the country, and is key to the country’s economic growth.