The Conundrum of Low incomes and Expensive Homes
The Conundrum
of
Low
incomes and Expensive Homes
The most perturbing fact that transnational
companies find in India is the absence of any correlation between real estate
prices and per capita income. No economic logic convinces them of this stark
phenomenon. And truly so, since the reasons behind high real estate prices in
India goes behind generally accepted rationales. The real causes have more to do with legacy
issues, behavioural patterns and historical beliefs - solution to which lies
not just in changing regulation but also in reversing mindsets.
The key complex philosophies that create high
real estate prices are :
1. Historical legacy still dictates fiscal policy :
Historically, land-based taxes have been popular with governments
since it meant :
a.
Low cost of collection - large revenue
could be garnered through a few transactions
b.
Easy traceability compared to other trades
- other trade transactions were poorly
reported
c.
Taxing the rich - land was largely owned by zamindars (large landlords) and other
rich people so land-based taxes were politically acceptable.
Things have now changed
considerably. Majority home buyers are from middle/lower classes so land-based
taxes hurt them the most. Technology has
now enabled low-cost tax collection even from micro-transactions across
businesses. Thus, there is a huge scope for reducing the dependency on
land-based taxes.
All taxes and charges put
together, the govt’s share (in one form or the other - GST, stamp duty,
development charges etc.) from the sale of new homes comes to as high as 30%. In the case of most industries, government’s shares are 12-18%. Basic industries like roti and kapda pay around 5%, hence, it is unfair if makaan has to share 30%.
2. Status of Real Estate remains neither industry nor
infrastructure :
The problem with real estate is not just of
high govt charges but the fact that most of these payments are front-ended.
Full stamp duty is to be paid when the developer receives just 10% of the sales
receipt. Development Charges/ FSI premiums are to be paid at the time of
approval of plans (without any revenue coming in). High govt charges during the project execution stage not just increase the cost and risk of the project but
more importantly they reduce govt’s stake in the project. In case of industrial
and infrastructure projects, state governments themselves work towards timely
completion since these projects are perceived to be in public interest. When it
comes to real estate, project completion is looked upon as benefiting only a
private developer. A fundamental change in approach is required.
Today with RERA’s Escrow Account mechanism,
govt can secure all its payments from developers and can collect the same on
completion of real estate projects. Such an approach would make govt a
stakeholder in all real estate projects, increasing the confidence of buyers and
also reducing costs and risks for the business. Today construction creates more
jobs than manufacturing which makes it even a stronger case for change in government’s
perception towards real estate.
3. Consumer psychology reduces supply:
Acquisition of property in India
is considered a symbol of achievement and success. It makes the buyer feels that he
has arrived in life. And ‘sale of land’ is often perceived as signalling ‘dire
need for money’. No one, therefore, wants to be seen in the society as “a
person selling his land”. Further, hassles of buying another property from sale
proceeds (to save tax or otherwise) add another blockade before the property
is actually in the market for sale. Once the property is up for sale, owners show
resistance in selling below an expected return on their ‘cost of acquisition’.
As a result, we see a supply that is not only restricted but also being quoted at
high prices. Property buyer, therefore, has to go through a big maze before
being able to buy property at a reasonable price.
4. Citizens through their act make homes
expensive
A larger number of properties at
prime urban locations have multiple ownership (joint family, tenants,
co-owners, encroachers etc.). Many of these cannot be sold due to indecision
among stakeholders. Moreover, when even a single co-owner can veto the sale of such
lands, the costs and efforts involved in buying prime land are obnoxiously high.
To make matters worse, most multi-ownership properties are marked with disputes
and litigations. With over twenty million property related cases pending in various
courts, judicial capacity is insufficient to resolve these disputes and bring
large tracts of land into the market.
So while govt definitely needs to
change its approach towards taxation but efforts from citizens are also required
to remove supply-side bottlenecks. Detachment from old family properties and
seeing value in settlement than waiting for years in dispute are things that Indians
will have to learn. Such a multi-pronged approach only will ensure affordable real
estate and thus an efficient economy which transnational companies will find a
haven within their global supply chain.
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