Right Time to End Regulatory Capture of the Real Estate Sector
Real estate is a rigged market & therefore the most undeserving sector for any largesse. There are only a few sectors in the economy which are able to impart this kind of positive impact on job & livelihoods on people. Apart from home buyers, there are just a few customer segments which are more deserving than price relief. Urban property is still simply unaffordable for most city dwellers despite interest rate subventions under sections 80EE, 80C & 24 alongside tax-free profits for builders. Other option is commuting from distant peripheries.
GST Council which met on 10th January, 2019 cut rates on under-construction properties to 5 percent. Duties on cement were also additionally brought down from 28% to 18%. This will eventually help more people buy properties.
Rigging the Real Estate Sector However, there is a counterpoint which also should be considered. Real estate sector is one of the most undeserving sector which is worthy of any largesse. This is a rigged market by ministers, bureaucrats & builders at the state & central levels. Many hold their ill-gotten black wealth in real estate. This is the reason they have vested interested in keeping prices high by
spuriously restricting supply of land. There is no other business sector which epitomizes the term ‘regulatory capture’ other than real estate. Land & property prices are often rigged through opaque mechanisms. Building permits, zoning laws, controlling land supplies by limiting vertical building sizes & making related infrastructure investment are just some of them.
Real Value in Real Estate Though there is a strong case for bringing GST down on real estate & its supply chain, but if we fail to reform land markets, all these tax reliefs will end up benefitting the wrong parties. Looking at the index value reflections & underlying profits in real estate, what we should have seen is that real estate prices should have crashed by half at least over the last 11 years. But this has not happened because real value in real estate is captured outside balance sheets.
Why is Real Estate Market Weak despite Sops? This is a million dollar question! Why is the real estate market still weak despite the sops already given? The answer is simple. Apart from RERA, GST, demonetization, et al, & that the market is targeted at a very small segment of middle class population. Bringing down prices is the only way to expand the market. This means politicians, bureaucrats, builders & investors sitting on loss making inventories have to take sharp ‘haircuts’ at least.
Benami Home Owners & Investors Until & unless these types of corrections happen, either through formal cuts or through time bound adjustments facilitated by holding prices, housing markets will not be able to free themselves. Eventually, it translates to that the real estate sector will not be able to create millions of jobs (which it could) in urban & rural areas. This sector will be held hostage by investors & benami owners who will control land markets due to infrastructure plans, building permits & urban development policies.
Other Parties with Interests There are two other parties who are also interested in keeping the prices high. Banks which are frantically striving to expand retail loan offerings & people who already own properties & have loans pending. Nevertheless, both these segments can be protected by giving them regulatory forbearance on EMIs or easy provisions against properties whose values could depreciate & price of market properties fall as a result of greater transparency & reforms.
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