Although, prima facie, the 3% duty reduction looks immaterial, a 10% reduction in the upfront commitment for the homebuyer, is meaningful.
By HSBC Global Research
To incentivise home buyers, Maharashtra state government has decided to lower stamp duty on housing units by 3% (currently major cities have 5% and others at 6%), from September 1 to December 31, and then by 2% till March 31, 2021, (a seven-month window in total).
A typical new home purchase constitutes ~20% upfront equity contribution by the homebuyer, and usually the balance 80% is financed. Over and above, the property consideration, the transaction costs, including stamp duty, registration, brokerage and taxes, hover around 6-12% depending on the nature of the property purchased (under-construction / completed projects). In our view, a 3% savings on the property value effectively translates into 10-12% savings on the upfront equity contribution (assuming 80% is financed) plus the transaction charges, which are to be borne by the borrower.
We believe, these are meaningful savings for a homebuyer in the current environment, especially in the affordable and mid-income segment and the limited nature of the benefit could act as an incentive for buyer to make the purchase decision, sooner than later.
Although, prima facie, the 3% duty reduction looks immaterial, a 10% reduction in the upfront commitment for the homebuyer, is meaningful. This could be used as a significant incentive by lenders in the current environment where demand otherwise has been lagging. For HDFC, incrementally more than 1/3rd of fresh originations come from the affordable, low- and mid- income segment. In our view, a well-capitalised balance sheet and falling marginal cost of funds make HDFC well positioned to tap any potential growth opportunities. HDFC is our preferred pick among mortgage lenders; retain ‘Buy’ with an unchanged SOTP-based TP of Rs 2,310.
Prolonged lockdown situation could hamper growth and pose an asset quality threat in developer loans; and aggressive product pricing by banks could impact margins in the medium term.