A huge stock of unsold houses in Delhi NCR and Mumbai can be better explained by the fact that there is less black money now to buy these inflated properties. Although housing still remains the big storehouse of black money in India but the housing market in these two cities is down these days “because (political) bribes have come down in Delhi due to proactive efforts made by Prime Minister Narendra Modi’s government in the last one and a half years,” says Mohandas Pai, chairman, Manipal Global Institute. The real estate sector that constitutes about 12% of India’s GDP generates about 40% of the black money in India with Delhi and Mumbai having the highest component of black money invested in real estate.
Analysts say that India needs fair policies for the real estate sector. One major move would be to ensure that any sale of property, after holding it for more than three years, should be made tax free for the seller. This will ensure that there would be no capital gains tax on the seller and would further disincentivise people to undervalue the property.
As per the latest data compiled by the Jones Lang Lasalle (JLL), a real estate consultancy, Delhi NCR has the highest number of unsold houses (about 1,75,000 units) followed by Mumbai and Bangalore which have about 80,000 unsold units each.
Unlike the other major cities, a lot of speculators in Delhi and Mumbai invest in real estate to gain from the expected hike in prices. As per the White paper on black money presented in 2012 by the then Finance Minister, Pranab Mukherjee, investment in property is a common means of parking unaccounted money with a large number of transactions in real estate either not reported or under-reported. This is mainly due to very high levels of property transaction taxes, commonly in the form of stamp duty. “High transaction taxes in property is one of the biggest impediments to the development of an efficient property market,” says the paper.
Analysts say that India needs fair policies for the real estate sector. One of the policies, recommends Pai, should be to ensure that any sale of property, after holding it for more than three years, must be made tax free for the seller.
This will ensure that there are no capital gains tax on the seller and would dis-incentivise people to undervalue the property. This move will bring more money into the formal economy.
Would banks providing 100% finance help bring transparency to this sector? Analysts are not very optimistic. “Our banks would sink if they give 100% loans on property,” says Pai. The global financial crisis taught us that a 100% financing is unviable for banks. It would surely create more distress for Indian banks which are already battling a large quantum of non-performing (bad loans) assets. Perhaps the passage of real estate regulatory bill might address the issues that have made India’s real estate sector one of the most opaque ones in the world.
Anuj Puri, chairman and country head, JLL, feels that “the selling price must come down before any significant revival can take place in the housing sector.”
He adds that developers in the residential sector are feeling the pinch owing to high inventory levels and this is one of the reasons why new housing project launches have been at lower rates than earlier projects.