RBI Issues Circular On Levying Unfair Interest Charges On Customers

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The pandemic experience is forcing a lot of people to rethink their investment and retirement plans. Property as an asset class occupies the most important place in the investment thinking of most people. This is the market which is undergoing some significant changes.

Three factors have conspired to make property lot more affordable that what it was before the start of the pandemic in early 2020.

The year-long economic downturn caused by the pandemic further pushed down the prices of houses in a market which was depressed long before the coronavirus pandemic made its appearance in early 2020. In many markets, including Delhi and its surrounding areas, property prices have slid 15-30%.

This is also the year which saw banks reducing interest rates on housing loans drastically by 100 to 200 basis points. Interest rates on property loans up to Rs 30 lakh are now around 6.9% while the rate on higher amounts is 7.1%. This is not much if you consider the official inflation rate at 3.75%, which further reduces the real interest rate.

At the same time, existing property owners have seen the locked-up values of their properties eroding 15-30% over the past year or so. This is not good news for millions of people who preserve much of their wealth in properties and base their retirement plans on it.

“This is certainly a good time to buy real estate. Affordability levels at 7 to 10-year highs. Prices of real estate over the last few years have been flat to negative in most parts of the country. During this time, people have seen their salaries rise. Home loan rates are also at extremely low levels compared to the past,” Rohit Gera, Managing Director, Gera Developers, told Money9.

In many places, anxious developers are offering discounts or easy payment options, making the market more attractive for those ready to cherry-pick new property.

Property Vs Gold

Gold is more liquid and can be encased at short notice in case of emergencies. It is this value which has made gold an attractive asset for wealth preservation in Indian families for ages. Besides, gold can be bought in small denominations of as little as 5 grams while the property is a big-ticket investment.

But real estate scores when it comes to accessing bank finance for investment because housing loans can cover as much as 85% of the property value while there is little financing available for gold. Besides, there are tax incentives in real estate investment.

When it comes to returns on these two different sets of investments, the jury is out and perceptions differ. Besides, they vary from year to year.

Taxation

In Maharashtra, the local government reduced the stamp duty by a whopping 60% pushing up the number of real estate transactions dramatically. Knight Frank India reported last December that this reduction saw the registration of residential properties in Mumbai jump over two-fold in December to 18,854 units.

At the same time, there is some stirring in Delhi as the circle rates were reduced. High circle rates had resulted in a situation where market prices were much lower than circle rates. But those selling property had to pay higher capital gains tax because it is calculated on circle rates. This proves to be a disincentive for the new buyer as well.

The reduction in circle rates will make it more realistic and closer to real property prices and thus reduce the amount of capital gains tax that has to be paid on sales. But there is widespread criticism of the decision because the reduced circle rates cover a very small number of properties in the category A market of the national capital.