India’s K-shaped housing sector is in need of reformist tax tweaks

Now compare this to a feature published in Mint on 21 March that quoted Ankita Sood, head of research at Housing.com, as saying: “Affordable housing isn’t viable for developers because demand is subdued and input costs are higher.” The feature went on to say that demand for premium real estate remains very strong.

Further, estimates made by SBI Research suggest that during January-February, housing loans of up to ₹30 lakh formed around 45% of the total housing loans disbursed during the period, against 60% during April to June 2022, clearly indicating that demand for loans to buy affordable homes has come down post the pandemic.

So, why is this happening? This is yet another example of the post-pandemic K-shaped economic recovery, where the rich are doing well and others aren’t. But that’s the simple short answer. There is a longer answer as well.

The affordability of residential real estate in India has been falling over the years. This can be concluded from the breakup of housing loans given by banks to the priority sector versus the non-priority sector. In February, a little over two-thirds of the outstanding housing loans in rupee terms were given to the non-priority sector, with the remaining one-third going to the priority sector.

Now compare this to April 2007, when priority housing loans had formed around 71.5% of the outstanding housing loans. Between 2007 and now, there has been a gradual reversal, with non-priority loans in rupee terms forming a much greater proportion of the outstanding housing loans.

Currently, priority sector housing loans are defined as: “Loans to individuals up to ₹35 lakh in metropolitan centres (with a population of 10 lakh and above) and up to ₹25 lakh in other centres… provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed ₹45 lakh and ₹30 lakh, respectively.”

This has happened primarily because of a huge run-up in housing prices between 2003 and 2015. Home prices have increased at a much slower pace post 2015, but on the whole, they have largely continued to go up. In most large cities, the median price of a flat is ₹50-60 lakh. After taking stamp duty into account, it goes up even further.

In fact, repaying a housing loan of ₹50 lakh over 20 years at an interest rate of 8.5% would mean paying an EMI of around ₹43,400. Assuming that one-third of the take-home salary goes towards the EMI, someone with a monthly salary of around ₹1.3 lakh or more (or ₹15.6 lakh or more annually), would be eligible for such a loan. How many people actually make that kind of money? Even repaying a loan of ₹35 lakh needs a take-home salary of roughly ₹11 lakh per year. Clearly, residential real estate in India has been selling at a price where affordability has become a huge issue.

There are multiple reasons for this. First, economic growth is concentrated in a few large urban centres. And that has led to a huge influx of people into these big cities, pushing up housing demand there. Second, black money continues to prop up the sector. Third, housing is a positional good that conveys an individual’s standing in society and that drives up demand even among people who already have a house to live in. Fourth, renting a house continues to remain a pain. Fifth, throwing out a tenant who overstays is not easy, which leads many homeowners to keep their homes locked instead. Sixth, land prices around urban centres are very high. Seventh, no other sector is as closely connected to local and state-level politics as real estate is.

Like any other large socioeconomic-political issue, there are no neat and plausible solutions here. Nonetheless, there are a few things that can be done. First, the government can incentivize individuals to rent out homes. This can be done by making rental income up to a certain level tax-free or taxing it at a lower rate. This will help the government get a better estimate of the kind of rental income that’s actually earned in the economy as a whole, given that many landlords like to be paid in cash. Second, tax incentives on the sale of residential real estate need to be gradually done away with. There’s no reason for the government to incentivize people to buy homes they don’t need.

Currently, if a house is sold after being owned for more than two years, |a tax of 20% needs to be paid on the capital gains after taking inflation into account. Hence, the actual tax rate is much lower than 20%, incentivizing people who already have a home to live in to buy more homes. With better data accessible to the government now, such a tax benefit should be made available to only those who are selling a house that they live in and not a house that they merely invested in.

These and more such measures should hopefully improve the state of residential housing, which seems to be becoming more and more K-shaped by the day.

Vivek Kaul is the author of ‘Bad Money’.