The Conundrum of Low incomes and Expensive Homes

The Conundrum of
Low incomes and Expensive Homes

Also published in "Business Economic Diplomacy" in Nov 2018 issue


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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