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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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?"
Ravindra Bhagwat
Jul 23, 2014If cash transactions can be curbed, it will definitely lower the property prices as the demand from the black money holders/generators will contribute to reduction in overall demand to some extent. This will also reduce the returns on the investment in the real estate. But this alone is not sufficient to bring down the property prices. Supply of affordable housing and commercial spaces has to increase in the cities .This is intricately tied up with the land laws and development of new infrastructure and new urban centres providing livelihood to the large educated population. Only large scale reforms in all the spheres will be able to bring down the prices of real estate.
L. ASHOK
Jul 23, 2014Lot of work should be done. First Govt. must reduce the stamp duty to 1 or 2%, and the payments should be by cheque or DD, so that middle and lower income people can come with clean hand. Before that Govt. should ban all currencies above 50 Rs denomination and ask people to use cards for any transaction above Rs 5000.
krishnamurthy
Jul 23, 20141) Remove the right to immovable properties in constitution as in singpore.
OR
2)Restrict the holdings of afamily to 1200sft or 2400 sft in town as well cities.
Harinathan.K
Jul 23, 2014Black Money Menace is a cycle.
It starts with the builder/Developer planning to go in for a Project.
While some land owners agree to part with their lands at reasonable prices, others have to be induced by paying a good premium say up to 100-250% compared to others.
Then comes the Government Approvals stage- Purpose change from agriculture to Residential/commercial, Land Aggregation Approval, etc.etc. Politicians, Bureaucrats, Our local body/Municipality/ Corporation/ State government officials seek their cut which forms a very very significant part, up to 25-40% of the project value.
Sometimes, they demand free Apartments also as part of their cut.
Builder/Developer has very limited resources and hence resort to borrowings at hefty interest rates ranging up to 48% payable monthly and that too from unaccounted sources or from unorganised sources like Chit funds etc.
Procurement of the inputs is another area of big concern for the builder. Sand, movement of inputs to the site, power supply for construction etc. takes another 10-15% of hidden cost.
Over and above this marketing cost as well as margin has to be added.
If easy Approvals and source of funds at normal bank interest rates are made available at least 30% of hidden costs can be brought down and make the Apartment/house affordable for the buyer.
Last but not the least, over 10% pa, in EMI of about Rs.1,100/lac works out to doubling of the loan during the 20 year period.
If the Buyer has the wherewithal for availing housing loans at cheaper rates from other sources, he would even fund the housing loan on his own can pay the loan from his earnings, savings as well as Tax Shield.
If the housing loans are made available @interest rates in line with NSC/5 Year FDs, the same would be welcomed by the needy.
A forum should discuss these aspects and recommend a positive and really implementable solution should be placed in place at the earliest.
Hence, the entire subject needs a thorough review all over India for implementation.