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Realty Needs An RBI Rethink...

Monday, January 20, 2014

While Housing finance companies (HFCs) can consider stamp duty and registration charges while disbursing home loans, banks cannot. Thus there is no level playing field in terms of the loan offerings made by Banks and HFCs. Further, with stamp duty and registration charges spiraling, home buyers are being additionally burdened. So should the RBI reconsider  its policy? Mayura Shanbaug reports on the pros and cons of the situation where the real estate sector as also the home buyer continues to feel the heat from all sides...

Till February 2012 banks were permitted to include stamp duty and registration charges as Loan to Value (LTV) given to home buyers, thereby reducing the burden of upfront payment on the buyers. Thereafter the RBI has disallowed stamp duty and registration charges for banks to be included in LTV. Now a demand is growing strong that the Reserve Bank of India (RBI) should reintroduce the incentive and help the struggling sector.

Already the Ready Reckoner (RR) rates in Mumbai Metropolitan Region ( MMR) have been increased by 20% by the state government from January 1st  this year, sending the already pressurized and beleaguered real estate sector in tizzy. The hopes of a stay or roll back was partially met by the government with the 20% hike in RR staying put even for the luxury sector which was raised to 50 %.

The state government has set up a target of Rs.20,000 crores this fiscal from duties collected from stamp duty and registration charges.  Analysts and market experts have ever since gone into overdrive to suggest ways and means of boosting the sector and increase sales numbers with various sops either by government or by developers .

“The inclusion of stamp duty and registration charges by the RBI was to boost home loan products back then,” says Ram Sangapure, General Manager, Central Bank of India. “The resultant was banks came out with new products to lure customers for the various housing products that they launched something like a teaser loans. RBI felt that there is a systemic risk to banking sectors if the practice continues. After that the RBI decided not to allow cost of stamp duty and registration to be included in the total disbursed home loan amount,” Sangapure explains the reason behind apex bank's decision.

However, situation for housing sector has gone from bad to worse in the following years, with the overall demand for housing in the city plunging by double digit and inventory going up by the day. As per the recent report from Knight Frank the total unsold inventory under-construction and ready property is close to 130,000 units in Mumbai which clearly speaks for itself. But the government has steadily increased the RR rates every year. In 2013 the government had hiked Ready Reckoner rates by 30%.

“Increase in Ready Reckoner rates affect property prices in multiple ways like higher stamp duty, increase in fungible FSI cost, increase in TDR costs, etc. If the stamp duty rate increases, cost of the properties would definitely increase,” says Shobhit Agarwal, Managing Director – Capital Markets, Jones Lang LaSalle India.

“However, the magnitude of impact would vary according to the increase in rates (which in turn depends upon the location) and proportion of the costs that the developer wants to pass on,” says Agarwal.

On the reintroduction of the RBI scheme Agarwal says, “The option was in practice a few years ago, so a re-application of it cannot be ruled out. If re-applied, this can definitely provide ease to buyers as the upfront contribution from the buyers pocket reduces.”

Pankaj Srivastava, COO, Maitreya Realtors & Construction feels RBI  should be made aware of the concerns of the builders segment and the determinately effect it has. “As the industry needs some impetus to revive the sluggish market, and the recent hike in RR rates and the other steps taken by RBI is having a detrimental effect on the industry,” he says.

Srivastava believes that there will be an adverse impact on the sales with the increase in the ready reckoner rates. “This is largely because various statutory and legal charges which are payable by the buyer of the house is calculated on the basis of ready reckoner rates, which is fixed by the government for the particular area. This has surely led to increase in the property cost,” he says.  

Ironically stamp duty rates in Mumbai are the highest in the country. With the new RR would have a severe impact on cost of properties. A recent report indicates that buyers of flats in luxury properties that exceed 4,000 square meter, or one acre of plot with a common gymnasium, club-house and swimming pool, would have to shell out an additional 15% as stamp duty.

“The increase in property prices will be in the range of 10 -25% depending on the amenities provided by the developers. In case of high end property the increase will be close to 25%,” says Rajiv Raj, Co-Founder & Director – CreditVidya.

“In view of the recent hike in stamp duty which will bring additional burden on property buyers RBI may have to look at including the stamp duty and registration cost which was earlier permissible as a part of the property value,” feels Raj. “This will help to marginally increase the sale of property which is been affected due to high prices and low demand,” he says.

However, the Housing finance companies (HFCs) are already considering stamp duty and registration charges as the part of LTV. Thus there is no level playing field in terms of the loan offering made by Banks and HFCs.

“It is empirically seen that when stamp duty and property rates are moderate, the number of transaction have gone up,” explains Rajiv Raj.

The “State government should work in getting reasonable stamp duty to boost the sluggish property market,” he says. Raj feels since RBI has kept the rates unchanged in last fiscal policy, few leading banks have reduced the interest rate of home loans.”Further reduction in home loan rates is expected which will encourage end user to buy properties,” he adds.

Echoing similar sentiments, Shobhit Agarwal says, “While buyers are facing a problem of unaffordability, the high cost of land, construction materials, labour and finance are providing limited flexibility to developers in terms of pricing their product.”

“I believe a product (requirement) – price (affordable) matching exercise is warranted to improve the absorption and boost the sentiment,” he says.
However, Ram Sangapure does not foresee that RBI would relax or re-introduce the scheme again for the very reason that they have stopped it.  

He pointed out that in spite of the sluggish market the data released by the RBI   for the last two quarters shows good growth in home loan portfolio up to Rs1 crore. He also believes that RR rates hike will be absorbed in the system.  “I don’t see much effect of the increased ready reckoner rates on the price appreciation as the appreciation that has to happen in the last few quarters has not happened due to sluggish demand and the prices are stagnant for the last six months,” says Sangapure. 

“The price appreciation that has to happen will happen in mid segment on the lower side and will not be more than 5%.” he concludes.

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