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Tax sops spur housing demand - Views on News from Equitymaster
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  • Apr 12, 1999

    Tax sops spur housing demand

    While presenting the budget for financial year 2000, the finance minister Yashwant Sinha brought to light one harsh reality that highlighted the low standards of living in rural India - the rural housing shortage had topped 14 million dwelling units. The finance minister took up the challenge to provide 'housing for all' and rightly made it a focus area for the budget. The results are for all to see.

    The housing finance sector has been a direct beneficiary of the measures introduced to perk up activity in the housing sector. This is more than evident from the accompanying graph that reflects on the scorching rate at which business grew for these companies.

    The finance minister proposed a number of measures to perk up the activity in the housing sector. The measures having a direct impact on the cost and availability of housing finance included:
    1. The interest on loan taken for a self-occupied property was made exempt to the extent of Rs 75,000 (US$ 1,745) as against the earlier ceiling of Rs 30,000 (US$ 698)

    2. Interest rates for borrowers in smaller cities (where the Urban Land (Ceiling and Regulation) Act is not valid) (ULCR Act) were reduced

    3. The scheduled commercial banks were directed to invest three percent of their incremental deposits in the housing finance activities, and

    4. The interest income of housing finance companies was now to be taxed on actual basis as against the earlier method of taxation on accrual basis.

    The government has taken care to ensure that both the demand for housing and supply for the same are adequately balanced. While on the one hand it has stimulated demand by providing access to affordable finance, it has ensured by repealing the ULCR Act that more land becomes available to provide for the growing demand for housing. The success of the measures is evident.

    Although the numbers for the construction of new housing units are not yet available, it is generally accepted that one of the factor contributing to the surge in demand for cement and steel (the raw materials) is the step up in construction activity.

    Meanwhile, the jump in demand for housing finance (estimated to be 35 percent for financial year 2000) has been phenomenal. The housing finance companies are having a field day with surging demand and relatively little competition. The lower property prices, mainly due to a sluggish economy, and the decline in interest rates has further boosted the demand for housing finance.

    Housing Development Finance Corporation of India (HDFC), the industry leader, disbursed over US$ 349 m during the first half of the year. The other major players, Housing and Urban Development Corporation, LIC Housing Finance and PNB Housing Finance disbursed over US$ 163 m, US$ 151 m and US$ 12 m bn respectively during the same period. Another housing finance company, Shelter, a subsidiary of Citibank, is expected to register a rise of over 100 percent for the whole year.

    The lure of the housing finance industry is attracting more players. One of the recent companies to jump into the fray is ICICI Ltd., a financial institution that is aiming to convert itself into a universal bank. A number of foreign companies too are eyeing the market. This increasing number of players is likely to put pressure on margins as companies compete to grab a larger pie of the market.



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