Within a week of presentation of the Budget on February 1, the RBI cut the repo rate by 25 basis points on February 7 as the Monetary Policy Committee (MPC) projects the CPI inflation in H1 2020 between 3.2-3.4 per cent and 3.9 per cent in Q3.
In the Union Budget 2019, Finance Minister Piyush Goyal has taken some policy decisions on real estate, like tax relaxation for two years on notional rent paid by developers instead of one year, allowing individuals to own two self-occupied properties as well adjust capital gains from sale of one property in purchase of two properties. Apart from these decisions, the tax rebate on enhanced taxable income of Rs 5 lakh would also affect the decisions of home buyers.
Within a week of presentation of the Budget on February 1, the Reserve Bank of India (RBI) cut the repo rate by 25 basis points on February 7 as the Monetary Policy Committee (MPC) projects the CPI inflation in H1 2020 between 3.2-3.4 per cent and 3.9 per cent in Q3 versus 4 per cent expectations in the previous policy.
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Now, let’s analyse the probable impact on realty prices of these decisions of the government and the RBI.
Increase in tax relaxation period on notional rent
The increase in tax relaxation period on notional rent paid by developers to two years from one year would provide developers more time to dispose their unsold stake rather than offering high discounts to clear the inventory, which as per ANAROCK data, across the top 7 cities is 6.73 lakh units, of which 85,000 are ready-to-move-in.
While the buyers would no longer get heavy discounts on ready-to-move properties, this decision would not help solve the liquidity crisis of the developers either.
“The tax on notional rent on ready-to-move-in properties after one year of their completion was an additional cost to builders who were already reeling under the liquidity crisis. This is why several builders preferred to sell their ready units at discounted rates rather than holding on to them and paying taxes on notional rent,” said Santhosh Kumar, Vice Chairman – ANAROCK Property Consultants.
“Thus, while this new tax exemption will benefit some developers, buyers may have less power to negotiate on their properties,” he added.
Allowing to hold 2 self-occupied properties
The decision to allow individuals to hold two self-occupied properties would enhance demand for real estate. While highly mobile millennial executives will have liberty to buy another property in the cities they move in, wealthy home-owners may vie for acquiring a better accommodation.
So, overall demand may increase, helping the real estate sector clear the unsold inventories, in which, according to ANAROCK data, 67 per cent housing units are in below Rs 80 lakh range, while the remaining 33 per cent are luxury units with prices over Rs 80 lakh.
The huge stock of unsold properties would ensure stable prices and help developers solve the liquidity crisis, which would again ensure higher developing activities and higher supply to match the demand.
Using capital gains to buy 2 properties
This decision acknowledges the dipping joint-family culture as millennials stay away from family to earn higher salary. This will help families sell larger houses suitable for joint families, which are generally situate in heart of the cities, and use the sale proceeds to buy two houses at different locations without attracting capital gain taxes.
This decision may see spike in demand for affordable houses, which are currently focus of real estate activities of the developers following Prime Minister Narendra Modi’s housing for all push.
Enhancement in tax rebate
The enhancement in tax rebate would ensure spike in housing demand as the Rs 2 lakh deduction on interest on home loan, along with other deductions, would help salaried people earning even Rs 10 lakh in a year to reduce the taxable income to Rs 5 lakh, which is the threshold to get full tax rebate.
While the deduction on home loan interest is attractive for all segments of house buyers, the incentive to get full tax rebate would push the middle-income group to buy houses, giving the affordable housing schemes a boost.
Repo rate cut by RBI
The rate cut would infuse positive sentiment in the real estate sector, which, apart from bearing the burden of inventories, has also got hit by the NBFC crisis following the IL&FS fiasco, tightening the liquidity situation further. Moreover, increase in home loan interest following RBI’s last rate hike created a sombre mood in the sector.
“Rate cuts give a substantial push to property buyer sentiments, and it was certainly high time for such a cut. Home loan interest rates increased by as much as 5-7 per cent in the last one year because the RBI hiked its repo rates by 50 basis points over the same period. In other words, home loans had become a more expensive proposition,” said Anuj Puri, Chairman – ANAROCK Property Consultants.
Welcoming the RBI rate cut, Shishir Baijal, Chairman & Managing Director, Knight Frank said, “As a result of this reduction, we hope that banks will pass on the benefits of the revised rates to the end consumer of loans, thereby making it easier for them to make their purchase decision. For a sector which has been suffering from poor end user demand for some time now, this is a step in the right direction.”
An interest rate cut in housing loans by banks would supplement the Budget decision to allow buying two houses by using capital gains from sale proceeds of a single house and the nod to hold two self-occupied properties along with the increase in tax rebate. But it has to be seen how much of the repo rate cut is passed on to home buyers by banks and how long they take to pass the benefits.