The Indian Economy Blog

January 4, 2009

A Real Estate Triggered ‘Stimulus’ Idea

Filed under: Fiscal policy — Arjun Swarup @ 11:10 pm

IEB reader Durgesh Prasad, sent in this idea, via email to some of the IEB contributors.

In today’s slow economy, where government is trying its best to keep the real estate market rolling and attracting investors to invest in real estate market in order to keep market live, I had an idea through which it can be achieved by government without loosing anything. Presently, the deciding period of differentiating a CAPITAL GAIN as Short term or Long term is 3 years period. If one sells his new house in less than 3 years and incurs profit, the gain is termed as Short term capital gain. And if he sells his new house after 3 years and incurs profit, the gain is termed as Long term capital gain. Now there is no way to avoid tax in short term capital gain, whereas there is way to save tax in long term capital gain, if the profit incurred is re invested in another residential house of price more than the profit.

The above way of saving tax from long term capital gain will help in rotating money in market to some extent, as it will result in at least two transaction of selling and buying a residential property. Considering this advantage, if Government can REDUCE The differentiator period from 3 years to say 2 years, then the market player who might be waiting for next year to sell his house to re invest, may do it so today and in a way will improve rolling of transactions in Market. Government will not loose anything , but will just be helping in moving the selling environment for its public to one year sooner. ( later on when economy improves, the years can again be raised to original 3 years )

IEB reader Piyush Goyal (pgoyal77@gmail.com) sent in the following comment -

Good idea without working out Revenue ramifications for the Govt. – Decreasing revenue would lead to further increases in deficits. Not a desirable side effect of the Capital Tax change prescribed.

Real estate in India was a bubble that needed to be pricked and was rightly so in this current market turmoil. The bubble was largely an effect of $’s looking for homes. As $ flow reversed course (for a myriad of reasons including margin covers, unwinding large diversified derivative positions etc etc), the bubble burst. My guess is that the affordability index of residential properties reached heights never seen in the Indian market during this bubble and popping of the bubble was a good thing. The 3 year lockdown on Cap-Gains is a great policy that needs to remain. MY TAKE – Real Estate (Residential Real Estate) should in a country like India never become an investment asset. No more Cap Gain benefits, not even after 3 years holding period.

One school of thought blames the “CapGains Clause” and “Income Tax gains on Interest Payments” as the excacerbating cause of the bubble in the Real Estate space in US and the resultant crash.

As the situation around the globe/US improves over a period of 3-4 years, the tremendous amounts of $’s being printed by the US Fed will once again look for homes to park and India will once more be ripe for a bubble of sorts in the RE space.

India needs to manage not just this current slowdown but also the impending bubble that might follow. Monetary policy cannot be ad-hoc and directed towards one marketplace or another, but deliberate and planned affecting prices across the economy – It should not cause bubbles and rolling recessions, instead should be used to smoothen the growth rate of the economy/GDP to Trend Growth Levels. Price stability is tantamount not fixing a market or two.

The sincere thoughts of the writer are appreciated but slowdown in a sector (mostly irrelevant and excess prone sector like RE) cannot and should not be cause for myopic policy – Long Term (Medium Term at the very least) price stablity should be the goal of both Monetary and Fiscal policies.

6 Comments »

  1. Agree with Piyush, why should the goverment inflate over heated property bubbles? India would probably end up with a super bubble based on value less money created in US. Indian goverment should do everyting to keep the propery market subdued(hard to do in India!), so it doesn’t suck up capital and generate no value.

    Comment by Sri — January 5, 2009 @ 8:48 am

  2. Complete agreement with Piyush. The Indian property market is already a super bubble. Residential property need to be taxed based on occupancy levels. This will go a far way in providing affordable housing.

    Comment by Praveen — January 6, 2009 @ 12:40 am

  3. Hi there!

    I dont think that a small factor like this could have any significant impact on real estate market.

    However, if there are other measures that the government had taken to pull the markets up, I would like to know.

    Thanks
    Nitin

    Comment by Nitin — January 29, 2009 @ 7:53 pm

  4. How does putting more houses for sale when there aren’t many buyers going to help property developers?

    Property prices, specially commercial properties, do not make any sense. I saw a USD 4 MM property in Punckula whch was leased out as a photocopy shop. With commercial borrowing at 14%, how is this effective used of money? Some would call this old economics but at least old economics makes sense.

    If real culprit is black money or alt money, should that not be put to effectve use by brining it into real economy? How come India ends up with so much of secondary economy every few years?

    I believe this capital gain waiver should be done away with completely. Let it reduce the price of property. Let more people afford to buy a houses and in the way create more jobs.

    Comment by Ajay — February 16, 2009 @ 10:24 am

  5. Can Someone help me understand, Whom are the Realtor wants to benefit ie The Reltors Themselves OR The property Dealers OR The Buyer ???

    If you look at DLF , Unitech, Parsvnath, BPTP websites, They declare all their flats are SOLD OUT. So where is the money thay have collected from the Market ??

    The Q2 results of DLF showed an EBIT of 55% , outstanding from any corner, Then why do they need Government Assistance.

    Seems, these builders have sold their flats in bulk to property dealers, Who are now putting pressure on the Builders to pressurise the government to announce stimulous schemes for the buyers, Anyone who tries buying property will realise this phenomenon.

    Comment by Kamal — February 21, 2009 @ 12:22 pm

  6. The recession has once again unfolded the big scam that was cooked by some of the big real estate firms and government bodies in general. If we see the land records and the land bank of some of these firms, It is quite clear that The land Bank possesed by these entities was inflated thanks to the High valuation acorded to them by the stam valueing authority and a benchmark used by banks to value the land bank to extend credit lines. I close scrutiny brings forth that the land which these entities bought at say x Rs got valued at 5x times thanks to the prevailing circle rate fixed by the government body 4 collecting stamp. And why such absurd valuation by the gov. body.. any body can guess…well vested intrest…..Only a fool will not leverage by pledging an asset of value x to get 4 times the money…..STILLL all these so called analysts slept….And this was the prime reason as to why we saw unpresidented flow of capital into this sector, it was sheer leverage so bought which was feeding the bubble. Other wise how come an asset class becomes so valuable that it makes an individual HNI overnite surpassing all forms of his life long earnings….In real terms except for few pockets of land this is simply not possible….

    Comment by Shobhit — April 1, 2009 @ 12:23 am

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