Property prices have been stagnant in most cities, and in some cities they have been slightly below levels seen three years ago. Despite prices not rising, home buyers are still not confident enough to make a buy decision. One of the reasons for this is lack of confidence is the delays seen in existing projects. Another reason: expectations of a fall in prices.
Investors, too, are staying away because substantial returns are not expected.
Home buyers and investors were expecting a lot from this year’s Budget, but no significant announcement came through. There was some relief for home owners who are suffering from builder delays, and first-time buyers in the affordable segment. The bigger development, though, was the passing of the real estate Bill, which was passed a few days after the Budget, and is now an Act. The Real Estate (Regulation and Development) Act, 2016, was implemented on 1 May. Each state government has to now formulate rules as per the Act within one year.
If you are planning to buy a house this financial year (FY), here are a few things to consider.
New projects are expected to be launched in this segment at prices lower than before. Also, the Budget proposed to exempt service tax on affordable houses of up to 60 sq. meters (about 646 sq. ft.) constructed by central or state governments, including those through public private partnerships. A 100% deduction on profits from a housing project with apartments up to 30 sq. meters (about 323 sq. ft) in four metro cities and 60 sq. meters in other cities, approved between June 2016 and March 2019 and completed in three years, was also proposed. These incentives are expected to reduce the cost of construction for developers, the benefits of which may be passed on to home buyers.
Besides, if you are a first-time buyer, and are planning to buy a house costing less than Rs.50 lakh with a home loan of not more than Rs.35 lakh, you can claim an additional deduction of Rs.50,000, under section 80EE of the income-tax Act, for interest paid on the loan. These benefits are available if the loan is sanctioned in FY17. This is over and above the tax benefits you get for availing a home loan under sections 80C and 24(b).
These may make the house you want to buy more affordable.
Under-construction properties look attractive because their down payment is kept low, at about 10% of the property value. The remaining amount has to be paid either based on construction or in phases. The going gets tough when the construction does not happen on time. If you have taken a loan, and construction is delayed, equated monthly instalments (EMIs) and rent both continue. According to data by PropEquity, a real estate research firm, there is an average delay of more than 30 months in completion of projects that were scheduled to be delivered between 2013 and 2015 in the National Capital Region, 26 months in Mumbai Metropolitan Region and 24 months in Kolkata.
“This will be the situation for some time to come. Project delays are a result of how the markets have been behaving,” said Mudassir Zaidi, national director, residential, Knight Frank (India) Pvt. Ltd. “Cash flows are difficult to come by, sales are going down, banks are not lending, private equity money is not coming in, non-banking financial institutions are steadily reducing exposure. It is going to take some time before these issues start getting addressed,” he said.
Long delays also reduce tax deduction available on loan repayments. No possession means no tax benefit on the home loan. The limit of deduction depends on the number of years the house has been under-construction. Some relief in this aspect comes with the Budget proposing to extend the period within which a project has to be completed to claim the higher amount of tax benefit. Till now, if construction was not completed within three years, the maximum deduction allowed to a tax payer on interest on a home loan was Rs.30,000 per annum, instead of Rs.2 lakh under section 24(b). The duration has now been increased from to five years. But considering that delays are going to persist, it is better to avoid under-construction houses.
A project that is at an advanced stage of construction brings down the risk and also the cost, to an extent. Though units in completed or near-complete projects cost more than something that is still being built, given the current market conditions, it is better to opt for a ready-to-move in property.
If you are able to find a resale property that is nearing completion, then there is an added advantage as you will be able to get an exact idea of what you are buying—space, ventilation, outside view, floor, and more. You cannot do this with sample flats and project layouts on paper.
Real estate regulator
Many of the issues crippling the sector are expected to be controlled once a regulator is set up for the sector. But a real impact will take long to come by. “It could take as long as a year for any real impact,” said Anuj Puri, chairman and country head, JLL India.
Agrees Zaidi: “(It will be) another year or so before the regulator comes about and starts working. It will take a year more after that before any significant impact starts gaining ground.”
Once a regulator is established, it will govern both residential and commercial segments. Within the residential segment, projects that are more than 500 sq. meters in size or have eight apartments or more, will come under its purview. All projects to be launched and those under-construction will have to be registered within three months of the regulator being set up. The builder will have to maintain an escrow account, where 70% of the construction cost has to be deposited, and used only for the specific project. Money received from a home buyer has to be deposited in this account within 15 days of receipt.
While all these steps are in the right direction, they have not been implemented yet. So, if the plan is to buy a house within this year, look for those that are either nearing completion (in six months to a year) or are already complete, even if cost is more.
Credits Live Mint