Understanding the Rise & Rise of Real Estate Prices in India - Part III
Industry experts say that with India Inc expanding into the country's major metros, the upward trend of rentals will be witnessed primarily in and around existing and upcoming business districts, due to huge demand from top and middle level executives with transferable jobs. With sale values going sky high and home loan interest rates being revised upwards, many potential home buyers have currently put off plans to buy, preferring rental housing for now.
The builders' bid for the land to match the reserve price of the land is decided by the development authority. If the land is expensive, it will have a cascading effect on the price of the houses as well. The government recently hiked the Cash Reserve Ratio (CRR), leading to the increase in the cost of the house. The rising construction cost and land prices will ultimately be passed on to the end user. Therefore, we are not able to fulfill the requirement of low cost housing in the country. The real estate sector gives service tax at two stages.
When the builder builds a house, he pays service tax on the bills of architects and those involved in the construction. Now he has to take service tax from those who buy his flats. The builder is treated as a contractor if the customer is buying a house during the period of construction. Besides service tax, the industry pays two types of tax -- VAT and stamp duty -- levied by the state government. So the industry has to bear the load of three types of taxes. Stamp duty rates are inconsistent and exorbitant across the states.
The government should treat housing as a priority sector. Housing is a need and not an industry. A policy will have to be framed integrating suppliers, consumers and municipalities. A big chunk of housing is lying locked. The problem must be addressed at the policy level. This can solve the problem partly. As far as incentives are concerned, adequate incentives are available on home loan.
Rental housing should be promoted. Tax incentives are given and rent control act be made uniform. The landlord will be encouraged to give his house on rent, if he is sure he will get it back after two years. The house owner should get a rebate on the rental income.
Monday, January 19, 2009
No Dream Too Big!
I’m for Sale, But at My Price!
Understanding the Rise & Rise of Real Estate Prices In India - Part II
If home prices have risen disproportionately with increases in personal income and interest rates, then there is a cause of worry. Moreover, when expectations of rapid price appreciation appear to be a major factor behind the strong housing market, the results are discomforting. The volatility in the price has to be driven by changing fundamentals rather than personal agenda of a handful of investors. Weaker fundamentals and non-transparent policies cause price declines in those countries with inelastic supply like India.
But basic fundamentals like inflation and nominal interest rates on the one hand, and housing prices on the other have a far reaching and seep impact on the prices if the market is driven by fundamentals. This link suggests that long periods of elevated inflation followed by a sharp deceleration of price growth may, in the shorter term, breed misalignments between house prices and longer-term determinants of residential real estate values.
Situations like this might call for greater caution on the part of monetary authorities. The feedback from property prices to credit growth is strongest in countries with a greater prevalence of variable rate mortgages and more market-based property valuation practices for loan accounting. In these countries the risk of a build-up of mutually reinforcing imbalances in the real estate market and the financial sector is more pronounced, indicating that authorities should closely monitor developments in property values
Dreams: At What Price ?
Understanding the Rise & Rise of Real Estate Prices In
High prices are keeping buyers out of the market, making it harder for firms to attract workers in pricey markets and breeding high consumer debt and speculative buying. Potential buyers see warning signs of a speculative market but worry they run a bigger risk if they wait and prices jump still higher. But it also has economic pitfalls.
If the reason the price is high today is only because investors believe that the selling price will be high tomorrow—when “fundamental” factors do not seem to justify such a price—then a bubble exists. The price per unit of the existing stock is determined in the demand side of the model, making the difference between the actual home price and the estimated price of particular interest in assessing the existence of a bubble. A positive difference would imply that current prices are higher than what the fundamentals can support over the long run, thus suggesting a bubble.
Few fundamental factors that influence the demand for housing over longer horizons include growth in household disposable income, gradual shifts in demographics (such as the relative size of older and younger generations), permanent features of the tax system that might encourage home ownership as opposed to other forms of wealth accumulation, and the average level of interest rates (possibly related to the long-run behaviour of inflation). The availability and cost of land, the cost of construction and investments in the improvement of the quality of the existing housing stock are longer-term determinants of housing supply.
Another factor affecting the liquidity of the housing market is the specific transaction cost framework such as the level of VAT, stamp and registration duties and inheritance taxes. Finally, the uncertainty about future prospects that follows periods of heightened volatility in housing prices tends to lead to a more cautious response of housing construction to shifts in demand because of the inherent irreversibility of this type of investment.
