Right booster dose for realty
Real estate sector which churns out the largest number of jobs after agriculture is not in a good stead across the country, barring a few pockets like...
Real estate sector which churns out the largest number of jobs after agriculture is not in a good stead across the country, barring a few pockets like Hyderabad. From Mumbai to New Delhi, real estate sales went through sluggish phase before showing some signs of recovery last year. Statistics reveal that sales peaked in 2010 before hitting the slow lane which continued till 2017.
As a consequence, unsold inventory piled up, pushing some well-established developers towards bankruptcy. After a pretty long-gap, sales registered a year-on-year growth in 2018. That's primarily because of demonetisation that the Narendra Modi government thrust on the country in late 2016. One may wonder why demonetisation lifted real estate sales while causing damages to many other sectors. The answer is simple. Post the note ban, people are scared of depositing their savings in banks. Instead, they are pumping the money into properties.
The other factor that worked in favour of the key sector is the implementation of RERA (Real Estate Regulation Act) which mandates timely delivery of residential units and stops diversion of funds from one project to another by a developer. This Act enhanced confidence levels of individual property buyers, thereby boosting sales. Still, overall sales are far below the peak level they reached in 2010.
For instance, National Capital Region (Delhi), the biggest market in the country, registered sales of 40,543 units in 2018, a tad higher than in 2017. But the total sales in the political capital of India were a staggering 1.17 lakh units in 2010. The story is no different in Mumbai, the country's commercial capital, which recorded sales of 63,893 units in 2018 against 1.07 lakh units in 2010.
There are myriad reasons for real estate sales languishing at levels far below the peak.
High interest rates on home loans, liquidity crunch and high local taxation like registration fees can be counted among them. But the foremost reason is high Goods & Services Tax (GST), the new indirect tax regime that came into effect in July 2017. Under this, properties that are under construction had initially attracted 12 per cent GST with input tax credit (ITC). However, GST on affordable housing was subsequently reduced to 8 per cent with ITC. This high taxation took a heavy toll on the sector.
Further, many developers did not pass on the ITC benefit to buyers, resulting in more tax burden on buyers. As result, people preferred finished apartments and residential units which were exempted from GST.Against this back drop, the GST Council's decision on last Sunday to reduce GST on premium properties from 12 per cent to 5 per cent and on affordable houses from 8 per cent to 1 per cent without ITC is a welcome step.
The lower GST rates when implemented from April 1 will come as booster shot for the sector, spurring sales. However, with GST on cement, the key ingredient, at 28 per cent and other input materials also attracting higher GST, it's unlikely that prices of properties will come down significantly. Moreover, the elimination of ITC is expected to increase use of black money. It is better if the government takes care of these key challenges, thereby giving further fillip to the sector.