How to get rid of corruption in real estate?
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Since real estate is the avenue where unaccounted cash can be parked easily, as most transactions happen off record, it attracts huge amounts of black money. In fact, as per reports, during 2005-2010 FDI in India's real estate has jumped 80 times! It is widely believed that this money was routed through shell companies that are located in tax havens abroad. Basically, this is nothing but round tripping which makes tracing the source of black money difficult. Of course, such a huge influx would cause property prices to rise as well.
So, the question is how does one get rid of corruption and black money so that property prices eventually reach sanity?
For that we reckon cash transactions on properties should be disallowed. In order to save on taxes and stamp duties people generally indulge in cash transactions. Say for example, if the property is worth Rs 10 m. In most cases, its official registered value will be much lower. Let's assume Rs 5 m in this case. The balance amount generally gets paid in cash. This way the end user saves on stamp duty and capital gains taxes, if any.
However, people forget that in such transactions they effectively don't save anything but are at a bigger loss. In the desire to save taxes they prefer to pay cash. But this is effectively unaccounted cash (Rs 5 m in our example) which continues to circulate in the real estate funnel.
As there is no other avenue which can easily absorb black money with so much ease, more people park their money in this asset class via the unaccounted mode. This inflates property prices. And it is ultimately the end user who bears the brunt. He may save on taxes by paying in cash. But forgets that the end price he pays to buy the property is much higher, thereby offsetting any benefit from saved taxes.
So, will a vow to not pay in cash by the end user eliminate corruption & black money peril? Obviously not, if you ask us, but it will certainly reduce the hazard to some extent. The reason being one also needs government's active participation to help fight this social evil.
Increasing floor space index (FSI) or land supply by changing the land classification guidelines can reduce property prices. If prices decline and come to more realistic levels unaccounted money would steer clear of real estate in search of better returns elsewhere.
Lastly, as an article in First Post suggests, government should enforce guidelines which monitor capital flows moving into real estate from overseas markets. For instance, China has such a guideline in place to ensure that excess liquidity from abroad does not create a bubble in its property market. This becomes especially important in the Indian context as FDI in India has jumped 80 times in this sector during 2005-2010, as stated earlier.
However, the question is whether the government will oblige and make such radical changes. Well, considering the builder-politician nexus it is anybody's guess. Unless political stakes in real estate subside property prices won't, is what we reckon.
Do you think eliminating cash transactions will result in property prices coming down?
Let us know in the Equitymaster Club or share your comments below.
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Chart of the day | |
And this is just one of the many reasons why China may get hit as far as exports supremacy is concerned. Unlike in the past, the labour cost in China has gone up. Meanwhile, the labour supply has become tight. Further, with China getting serious about clamping shadow banking, its manufacturing sector that is a major driver for exports is unlikely to get the support as in the past. A withdrawal of export subsidies by China in various sectors is a further dampener for China's exports. However, what is going to be China's loss could be a huge gain for India. Around 23.5% depreciation in rupee against dollar in last 10 years makes Indian exports quite competitive. What could aid India further are the favorable demographics, cheaper wages, access to raw materials and spare manufacturing capacities. As such, India seems to have the right mix of elements to dominate the exports market. All it needs to march ahead are the right policies and an uptick in global demand.
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Well, there seems to be some light at the end of the tunnel. The Narendra Modi government has chalked out a mega plan, which if implemented successfully, would ensure around eight hours of quality power supply to agricultural consumers and 24-hour electricity to rural households. The plan is to supply electricity through separate feeders for agricultural and rural household consumption. Moreover, the initiative also includes strengthening sub-transmission and distribution. As per an article in Livemint, the scheme is estimated to require an investment of about Rs 1 trillion. That's 20 times the amount budgeted this year. The investment will be spread over 5 years. The initiative aims to reduce India's aggregate transmission and commercial (ATC) losses by 5 percentage points. Currently, India's ATC losses stand at an alarming 27%. If the initiative is successful in lowering these losses to 22%, it would be enough to recover the investment.
From an investor's point of view, this scheme could create great investment opportunities in the power sector ad well as in ancillary sectors that support the power sector. And eventually, better power supply to farmers and rural households will boost productivity and income. And this could have a strong ripple effect across the sectors.
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Trading at about 20 times its earnings, the S&P 500 index's valuations are currently in the higher side of the range it has traded in the past. So, purely going by the not so comfortable valuations, the possibility of a correction cannot be ruled out. However, when and whether the markets would crash by such a sharp amount is something that would be difficult for anyone to guess. Especially considering that this time around there are a bunch of factors (read: excess liquidity) that are playing their part in rising asset prices - and the rise as such is not purely limited to earnings growth and quality.
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14 Responses to "How to get rid of corruption in real estate?"
V. Jagannathan
Jul 28, 2014The Govt should fix a single reasonable amount for approvals for construction purpose. It should tax vacant land kept for speculation. Registration of property should be based on the area and not market value. No body should be allowed to hold more than one house and that too only up to 1000 sq yard land.
BP Singh
Jul 27, 2014I have a few suggestions:
1. There should be no long term capital gains on sale of residential property.
2. The state government should be persuaded to reduce the property registration fee to not more than 2% with an absolute maximum cap of Rs.1.00 crore.
3. The source of funds used to purchase or construct residential property should not be questioned by any statutory authority for a period of 5 years.
sshri
Jul 25, 2014I remember V.P.Singh introduced a rule that Govt. can acquire a property it deems LESS than market price and then auction it, but nothing significant happened because nothing got acquired.
A slight modification : Anybody can purchase a property that is being sold at 5% discount to readyreckoner rate, within 1 week of registration, provided the price is 10% more than the price it is registered in (single payment).
Numbers, rates can be fine tuned, and will need some infrastructure (a website, updated via prop. registration data) but property market becomes transparent.
ajay k gupta
Jul 24, 2014It is not only black money there is full nexus of developers/ builders as the customer may be buying once or twice , The real estate developers have so many ways to dupe the buyers, they make only one sided contracts and I feel there is no way a buyer can go anywhere to even lodge his even the genuine complaint, the judiciciar has its own time.
parimal shah
Jul 24, 2014Generation of black money is partly also related to minimum 25 to 30% margin money for loans and non-inclusion of registration fees and service tax in considering loan amount applications by banks for house loans.
People are forced to borrow money and black money finds another avenue to park in needy buyers.
-Parimal
Prakash Madnani
Jul 24, 2014Sir , The upgrading of realistic values still needs improvement , as it is not rightly linked to the ground realities . The value of Land is shown as undervalued at less than 50 % in most of the reckoners , and for properties listed in Mumbai , in prime areas it is found minimum 35 % less than the prevailing market rates . Mumbai reckoner needs fine tuning , but the reckoners in northern india is shown as 25 % of actual rates . Built up area should be scrapped and only Carpet Area should be adapted to maintain complete transparency in real estate industry .
Sundaravaradan S
Jul 23, 2014Request to insert the word "USA", wherever it is relevant.
(e.g) USA markets to fall by 30%...
TOM JOSEPH FCA
Jul 23, 2014The govt should abolish stamp duty on property transfer
Refix the price to market value
Abolish long term Capital gain tax on property as in the case of shares
Remove high denomination notes from circulation
HARINATHAN.K
Jul 23, 2014Black money in Real estate Sector- while sending my comments about a few minutes back, I forgot to add another important area of concern, which I am sending herewith. Kindly add the same to my mail to make it complete in all respects.
Upon completion of the Project, Water Supply, Drainage Connection, Power Supply, Approach Roads and Building completion/Occupation Certificate are the last government related problem areas where nothing moves without speed money.
V.S.Patil
Jul 29, 2014I think tax rates and the slabs of stamp duty besides the money required to be spent unauthorisedly for getting one's project or residential/commercial building approved by the civic authorities expeditiously ( ie. greasing their palms which need not be explicitly said) are the main reasons for the generation of black money in real estate business. Added to this are the menace of undeniable politician-builder unbreakable nexus, mad rush of the people to invest in real estate expecting appreciation its value owing to the declining value of the rupee are also important factors contributing to the generation black money.This rush tempts one to accept any terms from the builder or the vendor to buy property be it on money without being recorded any where. As of now it appears a vicious circle. Unless people of all colour and hues become honest in their activities or at least less greedy, tax-rates, stamp duty slabs are considerably reduced and above all the role money is relegated to the lower rungs in the list priorities in our life and man tries to live a simple life, I think it is difficult to prevent generation of black money in our society. Though the government can significantly contain the menace, its efforts alone, whatever be the nature of its enforcement, wont yield the desired results.