Every business has to have an office. Preferably in Mumbai or New Delhi.

This could of course be rented, but many of them prefer to buy it. They need CAs, advertising agencies, car hire companies, and zillions of other service providers.

Where should the service providers be located? In Mumbai or Delhi.

Then it needs employees. A few basic skills but need him/her in the place of work….

All this does one thing. It pushes up costs. If companies are smart they will shift all support functions to say Pune (which is not still as bad as Mumbai in pricing, but is reaching there.

Sadly the government, and the banks will not want the housing prices / commercial real estate prices to come down…- Imagine what a 30% fall in real estate prices can do to the balance sheets of SBI, Icici bank and Hdfc ltd! Also the increasing prices of a house has a ‘feel good’ factor allowing the middle class guy/gal to spend their hard earned money. Ask them to save for retirement, they say ‘Arre I bought this house for Rs. 30,00,000,  NOW it is worth about Rs. 1.4 crores, I will sell it off and live in a cheaper place’. I have no clue whether it will happen, but right now it is the placebo effect at work!

Unfortunately high real estate prices suck money from the more economic activity and put it into commodities like cement and steel. Even though these are just ‘commodities’ the prices increase at a rate higher than inflation.

What can the banks really do? Simple lend to businesses that add value to the economy by creating jobs instead of giving home loans. Give say 50% of the cost of the house as a loan instead of 85%.

If Rs. 400,000 crores of bank money is withdrawn from the ‘real estate’ industry, will home prices come down? Well you do not need a PhD in banking to answer that question, do you?

If the banks started giving more loans to the SME – working capital, etc. at lower rates, and the governments created better infra (demand will take a longer time to build), there would be NO reason for all businesses to be in BKC and CP.

Suddenly you will have a demand for Baramati airport and Bhubaneshwar airport instead of people asking for more runways in Santacruz and Palam (oops Indira Gandhi hawai adda!!)

  1. We have our FM asking banks to lower EMIs so that people can buy cars/TVs/ACs etc etc. Why not ask manufacturers to lower prices instead ? I guess it is better to suck the blood of the common man through high prices and interest, and increasing govt revenue through VAT etc at the same time.

    Ditto with real estate. What will local governments do without revenue from property transactions/taxes ?

  2. Thoughtful post. I am a NRI and conciously avoided buying RE except one for self consumption bought without a loan and prior to NRI status.

    I wanted my capital to be used for businesses rather than building assets. Whomever I talk to in India be it friends or relatives, everyone recommends me to buy hot RE projects coming up in would be prime area. People think am crazy to think about funds for business.

    Our economy could propel only if we create more employment.These days every western country reports the job data as like inflation. We are yet to catch up.

  3. Akshat please do not speak Subramoney language!!! Govts. all over the world like to give ‘guaranteed products’ like nsc, ppf, lic, – so that they can get easy cheap money. Then planners say ‘see your money is safe’.

    Then they ‘help’ you buy a house, by giving you a tax deduction (a farce). Then you pay property tax.

    Sadly if i say all this on my blog, many people do not like it. So i go the old I S Johar song ‘Yeh duniya pagal hai…ya phir mein diwana’.

  4. however,this pretend-economy cannot work for ever.like gravity,this inches,slowly(or rapidly -depending on your perspective) but surely towards complete disaster which is the total destruction of the rupee.
    this is the fate of all fiat money.as long as money is a centrally planned commodity and interest rates (the price of money) is controlled by babus sitting in a building in Mumbai,we can be sure that misallocations and bad investments will continue and profit and loss considerations will be secondary.low interest rates are good for fat cat management since the importance of shareholders is diminished.
    the dance will go on for a while.then it will stop and once develeraging sets in,it will be painful demise of the hollow dream

  5. Home Loan with Down Payment of 50%. How nice it would be !!!

    I will not have any pressure from all over to buy a house. I can wait for few years before I can really afford a home.

  6. One good way to permanently end the real-estate speculation and permanently make housing affordable is to put a 100% capital gains tax on residential property. End of story.
    If buying another house in-lieu of present house, then take deduction to that extent (which is still available today), but thereafter, all gains are 100% taxable.
    It will be a one-time decimation of the banks balance sheets, but will end the ‘house is my retirement corpus’ stupidity prevalent today. It will at once end real estate speculation and bring down prices to affordable to genuine buyers in need of a home.
    It will also bring about good amount of mobility in middle/upper middle class who realize that selling their house in one place and buying another in a different city is no longer a big deal.

  7. Oh..and to ensure people don’t create shell companies just to hold residential property and sell the company to avoid the tax, residential property owned by companies must be separately valued during a transfer of ownership of the company and taxed at 100% gains from the selling party. Registration formalities of transfer should not be completed till the taxes due are paid.
    This goes for foreign companies holding Indian assets in India also, no special treatment for them!

    Actually, the best thing would be to declare that residential property being non-commercial in nature, only an individual/HUF can purchase and hold residential property in their name. If a company needs to accomodate any company personnel, they have to compulsorily rent it from someone.

  8. Thanks to the govt intervention on all fronts of RE, too many incentives rolled out for the buyers.

    Low equity of the buyer

    Black money transactions

    Peronal Tax incentives

    Capital gain tax avoidance options

    RE lobby is still fighting for higher tax benefits, escape from the service tax, not to raise the minimum wage of the labor and so on.

    Be it RE or Gold, our country continue to create a dead capital with no trickle down effect.

  9. i disagree with Luckyoye that a tax will solve this problem. taxation will hit only the symptoms without addressing the root cause.real estate and lowered lending standards are a direct result of cheap money,manipulated interest rates and govt’s infinite greed for leading the life of a prince on the income of a pauper.
    real estate (and other commodities ,physical stuff etc) arent really appreciating -it is the rupee that is going down.

    in fact if you think of it logically,if we had sound money,real estate prices should continuosly go down thanks to competition,better quality of building etc -like in TVs or computers or mobile phones.but real estate is not a competitive market -the prime mover in it is less housing demand and more cheap money seeking protection from the rape of the rupee.
    by taxation,you might deter some speculators,but the cheap money will not go anywhere.and with 100% tax,u can be assured that compliance will be 0%

  10. @pravin…my proposal does not address the problem of unsoundness of paper money (and its abuses by govt). Under my proposal, cost of real estate will still go up, but it will go up in relation to inflation and increase of price of ALL other goods/services in the economy.

    In the current situation, we are facing the problem that residential property prices have a significant speculative component (aka bubble) that is preventing genuine acquisition and use of the property for its actual intended use (i.e. as a place to live). I will agree with you that my proposal is only a bandaid in relation to redefining what is money in the economy.

    As regards to your inverse ratio of compliance and taxation, it is just a guess, can you support it with examples? Are you saying that with 30% income tax, compliance is only 70%? Or that because of 5% Property Registration fee, Registration Compliance is limited 95%? In that case, maybe under my proposal Residential Property capital gains tax should be 50%, since even at 50% compliance, in a few years, speculation in residential property would be history.

  11. Dear LuckyOye, 100% tax on the capital gain will sure demotivate the speculative buying but will also demotivate new investments (new housing projects) and which will lead to acute housing shortage and a high appreciation of old houses….vicious circle

  12. the 0% compliance was just a little hyperbole.in indira gandhi’s 97% income tax bracket regime, men like KK Birla showed almost no income since their car,house and everything else was a ‘company’ benefit to him.since 100% is a confiscatory tax,in practise only a few fools will pay it.i dont think indians will accept a randomly high tax rate anytime soon. it has to creep up -like in scandinavia or canada.we are in a lower tax regime these last 10 years and a sudden drastic reversal will only look not thought out.

    btw,speculation is a good activity.it is not completely useless.in good times it provides liquidity to buyers and sellers.in bad times like now,it shows us that there is an underlying problem -cheap money from the govt/rbi.it is like a high temeperature during fever .it tells you you are sick.merely taking huge doses of crocin or whatever reduces fever temporarily is a bad way to cure the underlying disease/infection.

  13. But none of u have considered the parallel black money economy. As long as this economy flourishes property prices CANNOT COME DOWN and people with disposable black income will keep buying up property.

    A good solution is to abolish income tax completely and probably have an indirect consumption tax.

  14. actually, the income tax makes up only 8-11% of the central govt revenue budget.so it is not a major component.income tax can be abolished 100% in a decade or so.8-10% efficiency improvement is not a high target over a decade.low hanging fruit like ITization alone can improve efficiency by 4to 5% while a little fraud/abuse/waste reduction of 3-4% over 10 years is something we should demand from a responsible govt(ha!).ending the tax will be a huge positive for the economy.
    so when someone tells you that your income taxes are important,tell him the facts.your money only pays a bunch of babus who waste it on their friends and cronies.it is of no use of the poor.

  15. Pravin u r so rite. Sometimes I wonder if Income Tax is kept just to feed the Income Tax office employees who are corrupt to the core. Look at the savings on salaries and establishment costs if this tax is abolished.

  16. And with the government tweaking policies to support the builders, it is not getting any better… the prices are going sky high…lot of black money avoids the crash.
    Renting a house is not roasy too.. u get pigeon holes at a high rent.
    Add to that, u never know when to pack your bags because owner wants to..

    Having said that, you cannot time the housing market(like in equities). if you get a decent location at a reasonable leverage, go for it.Buying a house for your living is worth it, if you could afford.:)

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