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Is an asset price bubble building up in the real estate market? Flats in posh Mumbai areas sell at the rate of Rs 50,000-70,000 a sq. ft. and housing plots in Gurgaon are going for Rs 1 lakh a sq. yard. This may sound like music to those who have been clinging on to their assets, it portends danger to buyers. The high real estate prices keep the majority out of the housing market and make the dream of owning a house more distant. The Indian property market is not homogeneous, yet it is apparent that many cities including Mumbai, Delhi and Bangalore have been experiencing massive house price inflation. Property prices in India are rising fast, and not just in the biggest cities. As the tech boom spreads across the country, as more Indians buy homes, and as the economy grows at faster than 8 per cent a year, real estate is attracting more investors, many of them from abroad. Just a few years back, Mumbai was dying in the face of a sharp shortage of housing options. But now things have reversed and there is plethora of housing options - if you have the money. Today, one has to reconcile to the grim reality that a premium flat in Mumbai commands a higher price than a medium-size flat in New York's Manhattan, notwithstanding the fact that construction costs in the Big Apple are five times as high as in Mumbai. Or, in Delhi, where the government and its various agencies are sitting on thousands of acres, which, if made available to the market, would surely decelerate the spiralling real-estate prices. Driven by positive growth in the economy, real estate in India is booming. The year 2006 started on a promising note when the Government of India opened the construction and development sector in February 2006, and allowed 100 per cent foreign direct investment (FDI) under the 'automatic route' in order to spur investment in the vital infrastructure sector. The concern is that in India stock prices are touching new highs. As it happens, a boom in one sector translates into a boom in another sector with investors rushing to park their money in a safe place. Also, add the foreign exchange glut in India fuelled to a great extent by software engineers parking their dollar salaries in real estate. Low interest rates over the last few years made bank loans easier. There is a latent demand for housing in India, but the people who buy today do so more with a view to make money out of rentals rather than with a view to stay in these houses. The end result is that people own multiple houses, when all they need is one and real estate is now a speculators' paradise. It is paradoxical that exceptionally high real-estate prices exist with poor infrastructure and services. It is owing to the inefficiency and laxity in both levy and collection of property taxes, coupled with corruption, that cities are unable to offer residents even basic amenities, such as assured water supply, electricity, an effective law and order machinery, and an efficient public transport system. While the meteoric rise in real-estate prices has led to a sharp demand-supply gap in several cities, the relatively large capital outlay required for buying property puts it out of reach of smaller investors. Things could worsen if India were to open its capital account, since the real-estate sector would be open to foreigners without any restrictions. An immediate step that could help arrest the phenomenon of unrealistically high real-estate costs will be to withdraw all the concessions available to the sector under the Income-Tax Act such as Section 54, where one can avoid capital gains tax by investing the sale proceeds in specified government securities, or subject capital gains beyond Rs 10 lakh to 90 per cent taxation.
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