Why is Property market still in doldrums??

Why is real estate market still in doldrums?? Many say, it’s because of BJP Government. But is this good or bad?? Let’s find out.

As we all know, property market in India thrives on cash (or unreported income). As long as cash is being pumped into the realty market, it thrives and investors make merry. However, the Narendra Modi government's efforts to uncover black money have reduced the generation of black money in the system. The impact of this change will become more pronounced in the coming months.

"With the new Black Money Bill (which was passed by the Parliament on May 26) and with the Cabinet approving the Benami Transactions Bill in May this year, the crackdown on Black Money will continue further.

All these steps by the Narendra Modi government have impacted the realty market in short term; however, it's a step in right direction (if we look at the long term prospects).

For too many years, people avoided taxes and pumped that cash into realty market. Consequences of such theft (avoidance of tax) meant property prices were shooting (almost doubling in 2 years). People parked their unreported income into real estate. Some bought 8 flats, some bought 15 plots. It was crazy. Real estate became the best asset class to make money in short period of time.

However, working class (or salaried class) was suffering because of high values of real estate. They could not buy their dream home. Their dreams of owning a home was fading, slowly but surely. Congress party did nothing to stop this mad rush to own the real estate.

Even though, Black Money from abroad can take time (years) to come to India. But, we have GOOD news that generation of Black Money within the country may slow down (or stop) and Property prices can become affordable for the working class and their dreams of owning a home can become a reality.

Investors can cry and they will cry, but it’s a step in right direction by Modi government. Few (maybe 1 or 2 %) investors shall not be able to decide the fate of 90% of public.

Amen :)

Will increasing property circle rates in Delhi stop black money transactions? We believe….No

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Delhi Government has increased the property circle rates across all categories of colonies. The change in circle rates has been effected from 23rd September 2014. The increase in circle rates has been a whopping 20%. What are circle rates? Circle rate is the minimum property price set up by the local government to calculate stamp duty and registration charges for any property transaction within the city.

Here are the new circle rates for Delhi:

	New Circle Rate for Land (in  Rs/Sq.Mt.)	Stamp Duty @5% for Joint Holding (in Rs)	Old Circle Rate for Land (in Rs/Sq.Mt.)	Stamp Duty @5% for Joint Holding (in Rs)	Differential (in Rs)	Increase in stamp duty 100 Sq Mt  plot (in Rs)	Increase in stamp duty 300 Sq Mt plot (in Rs)	Increase in stamp duty 500 Sq Mt plot (in Rs)	Increase in stamp duty 1000 Sq Mt plot (in Rs)
Category A	774000	38700	645000	32250	6450	645000	1935000	3225000	6450000
Category B	245520	12276	204600	10230	2046	204600	613800	1023000	2046000
Category C	159840	7992	133224	6661.2	1330.8	133080	399240	665400	1330800
Category D	127680	6384	106384	5319.2	1064.8	106480	319440	532400	1064800
Category E	70080	3504	58365	2918.25	585.75	58575	175725	292875	585750
Category F	56640	2832	47140	2357	475	47500	142500	237500	475000
Category G	46200	2310	38442	1922.1	387.9	38790	116370	193950	387900
Category H	23280	1164	19361	968.05	195.95	19595	58785	97975	195950

The stamp duty charges in Delhi are as follows:
Male - 6%, Female - 4%, Joint - 5%, Senior Citizen - 6%, Company - 6%

The idea behind increasing the circle rates in Delhi is to curb black money component which is rampant in property transactions across the country. Really, will increasing the circle rates curb black money transactions? We are doubtful; on the contrary, it may further push up the property prices and slow down the already subdued demand.

In our opinion, it is a lazy way of looking at the issue of black money in property transactions. So, what could the government do to curb black money component in property transactions?

• Equalize circle rates and prevailing market rates, i.e. there is no circle rate, in fact, stamp duty and registration charges should be calculated on the prevailing market rates. But this will increase the stamp duty burden on buyers. And hence, property transactions will slow down considerably and therefore loss of revenue for the government and adverse impact on the economy. To overcome this issue, government must reduce the stamp duty charges.

• Reduce stamp duty charges to 1% of property value.

• Reducing stamp duty charges and equalizing circle rates with market rates will encourage the buyer and seller to report the correct property value. And hence, it will help in curbing the black money transactions.

• At the same time, people will transact more frequently which will have a positive impact on revenue generation for the government.

• Therefore, need of the hour is to reduce stamp duty charges and equalize market rates with circle rates. Increasing circle rates at the current stamp duty levels will in fact encourage more cash transactions.

Is the revenue generation department of local government listening??

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What impact will RBI move of changing currency notes printed before 2005 and coming Loksabha Elections have on Real Estate sector in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

• Land purchase may slow down due to RBI move to change currency notes printed before 2005

We all are aware of the fact that virtually all land deals whether large or small takes place with huge amount of money paid in cash to avoid stamp duty charges. Now, Let’s assume, there is a land transaction that is going to take place between party A and party B and the market price of the land is rupees 5 crores. As per the circle rates, the land price comes out to be rupees 2 crores. The remaining 3 crores will be paid in cash by party A to party B. Given that, RBI has announced that currency notes before 2005 needs to be exchanged. In this situation, Party B is not going to accept cash amount with currency notes printed before 2005. Therefore, it puts pressure on party A to exchange his/her currency notes with the banks. And in certain instances, party A may not be in a position to go to banks for the exchange of currency notes due to the fear of income tax authorities taking note of such huge levels of unreported income. However, it is yet to be seen what impact will there be on realty sector, but there is all the likelihood of fewer land transactions due to the RBI’s latest move to change the currency notes printed before 2005.

• Elections and real estate

Elections are a democratic phenomenon, which happens every 5 years in India. There are two kinds of election namely assembly elections for respective states and general elections for parliamentary system in India. All political parties whether small or large, regional or national strive hard to win elections and form the new government. It is commonly known that to win elections, political parties use all kinds of methods from announcing distribution of laptops, offering cycles, to free subsidies. The idea is to target the voters with such schemes in order to swing the pendulum in their favor.

And to win these elections, large amount of money is spent on advertising, organizing rallies, pamphlets, banners, press, traveling to various constituencies. About Rs 10,000 crore was spent in Lok Sabha campaign in 2009. And according to some estimates, this time that figure will be between Rs 15,000 crore and Rs 20,000 crore. There is no hidden fact that, the huge amount of money required is spent in form of cash. So, where does this money come from? Well, political parties will claim that this money is raised from their followers, supporters. Who are these followers? To put it bluntly, there is no free lunch here. All these so called followers who provide cash to political parties will like to claim their spending if the party they support comes in power. These claims may vary from allocation of natural resources, tax benefits, subsidies, dissolved cases, etc.

Now, how are all these followers able to provide such large amount of cash to these parties? We all know that in India even though most businesses claim to do business by the rule of law, but in reality they do under report their income and it is that income that is ploughed in real estate, gold, or elections. All these sectors have the unending capacity to absorb unaccounted cash. Therefore it is fair to say that when elections are round the corner, the investment in gold or real estate may dip and funds may be diverted towards elections.

• Impact of elections on property sector in India?

As observed earlier that during the time of elections, the funds are diverted towards political parties’ election campaign. And the sectors that suffer the most are real estate and gold. Large amount of unaccounted cash is provided to these political parties which until now would have been parked primarily in real estate. In fact, during election times one can notice the increase in distress sale activity in real estate. Since, huge amount of money is required for elections; properties worth millions are sold at below market rates to generate sufficient cash for elections. It is also highly likely that real estate developers will cut down on new launches of housing units or commercial real estate and will solely focus on selling the existing inventory.

• Should I buy the property during election times?

From the end-uses point of view, it is possibly the best time to buy. One can focus on buying from secondary market or resale market. As suggested earlier, there is strong likelihood that distress sales will increase and it presents end-users with an opportunity to buy at lower rates. However, buying in secondary market means, one has to pay huge amount of property value in cash. It is also the good time to negotiate hard with the developer if one is buying directly from the developer.  Since developers are only focusing on clearing the existing inventory, it presents end-user with an opportunity to bargain hard and get substantial discounts on the property.

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How does black money hurt the country where it originated and how does it travel to foreign countries?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Black money hurts the country a lot. The tax revenues if reportedly accurately by individuals and businesses would have gone to the country’s exchequer. The government with right intentions could have used these revenues judiciously by building infrastructure (ports, roads, educational, healthcare, communication, power, etc) and that would have resulted in higher GDP growth, more jobs, and poverty reduction. Instead these revenues now lie with individuals & businesses and some of them invest these amounts in domestic assets such as real estate and gold. Why only real estate and gold? Primarily because of the ability of these assets class to absorb cash and this is turn distorts the property and gold market. Housing becomes unaffordable in a country where there is shortage of about 18.78 million houses as per the 2012 estimates. There are various other disadvantages of black money as we have covered in many of our other posts.

However, in this post, we are focusing our energies on black money that travels abroad. This is the worst form of corruption because money which could have been used for nation building is now building other nations. We pondered a lot and thought of ways in which this black money can travel outside. In recent times, stashing of black money in foreign banks (read, tax havens) has been the topic of debate between the political parties, media, and the public at large. There have been theories that Indians are the largest depositors of black money in foreign banks. There have been murmurs that the amount of black money stashed abroad could be as high as India’s GDP, which is close to 1.84 trillion US$.

In a press conference few months back CBI director (central bureau of investigation) put that number to be 500 billion US$, almost 35% of India’s current GDP. By any stretch of imagination, this is huge amount for a country, whose fiscal deficit is at record high level, whose infrastructure needs investment at a scale which has been unprecedented in human history.

There are various discussions, round tables with tax havens countries to bring back the money deposited to India. But so far, only a pittance of the total amount has been declared. It will take time, says government sources.

Now, the whole scene of stashing black money to foreign banks got us thinking…how the hell this black money would travel to those foreign banks? How? And in this article, we encourage readers to answer this very question.

Explored a bit and two possible scenarios came to our mind

Formal Routes:

1. Wire transfer: Wire transfer or credit transfer is a method of electronic funds transfer from one person or institution (entity) to another. This one looks formal and we are sure it can be traced with proper tools and training.
2. Buying foreign assets such as real estate, companies, etc: But this is all in white and traceable.
3. People traveling abroad: People traveling abroad carry the allowable cash with them and deposit it in foreign accounts. But that is going to take years to reach 500 billion US$.

Informal (or should we say black) routes:

1. Gold Transfer: Gold is bought by these tax evaders in the parent country and then the same is transferred to foreign shores in ships or chartered planes.
2. Money transfer: Rupee or parent country currency is converted to internationally accepted currency (usually US$) with central bank knowing all the details and then that converted money is flown to foreign shores in chartered planes. Now, this amount in internationally accepted currency is used by the foreign country for their own investment purposes which ultimately lead to growth in those countries at the cost of growth in parent countries where the money actually originated.

In all these informal (black) routes, we fail to understand, why central bank or country’s top political leadership is clueless in tracing the black money? As far as we understand, money just cannot move out of the country without their approval.

Our imagination took us to these ideas…but we are sure, there are talents out there who could help us in deciphering all this. Waiting to hear from all you guys out there about the possible routes of black money traveling to foreign shores.

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