Can't afford a Mumbai home? Well, Fadnavis govt is taxing it out of reach

13-Jan-2015    |    Source:

 If you thought the BJP-led government would bring relief to home buyers in Maharashtra, here's a dampener: Mumbai's realty prices are going nowhere but up as the newly-installed Devendra Fadnavis government has decided to increase the ready reckoner (RR) rates for Mumbai by an average of 15 percent with some areas even witnessing a steep hike of up to 40 percent.


For the real estate developer, the move is a double whammy as he not only has to pay higher stamp duty for land transactions but will also have to convince the buyer to shell out more to purchase property. The buyer meanwhile is steering clear from making such buys due to unaffordable prices. The average cost of a house in the Mumbai Metropolitan Region in 2014 was a whopping Rs 1.3 crore while the weighted average cost of a house in Greater Mumbai has soared to an all-time high of Rs 3 crore.


Ready reckoner rates are the prices of residential property, land or commercial property for a given area. These are revised annually by the state government to reflect market trends. It is on the bases of these rates that home buyers and builders pay stamp duty. Stamp duty cannot be below the ready reckoner rates, but can be higher, based on agreement values. While stamp duty is 5 percent of the ready reckoner or market rate, whichever is higher, the registration charge is usually 1 percent of the total value of a property from this year onwards.


While ready reckoner rates are the second biggest source of revenue for the state government, it also bridges some of the gap between stated agreement rates and the market rate. In Mumbai, there exists a huge disparity between the market rates at which transactions are taxed and the rates at which developers sell properties. The logic of hiking the ready reckoner rate is that it will reduce the amount of black money involved in each transaction, once the RR rates come closer to parity with the market rate.


Posh and expensive areas like Worli and the commercial hub of Bandra-Kurla Complex will bear the steepest hike of around 40 percent while rates in the suburbs like Goregaon, Borivli, Malad, Chembur, Ghatkopar and Vikhroli have also increased.
"If one wants to buy property in E Moses Road in Worli, the taxes will be based on the new rate of Rs 23,959 per square foot, which is a 40percent increase from the 2014 figure. In Napean Sea Road, the taxes will be based on Rs 79,005 per sq ft, a 15 percent increase," said an Economic Times report.
Since the RR rates are used as a benchmark to calculate registration, TDR, fungible FSI, etc, a steep hike will adversely affect sales because these costs make up a good chunk of the final price. Little wonder that developers are miffed, as Mumbai real estate is already suffering from low turnover and high unsold inventory.
"All taxes, including services tax, VAT and TDS will rise. Everything about real estate sector is interlinked to the ready reckoner rate. People can't even afford the prevailing prices and the further increase in rates has reduced the scope for price correction. Potential flat buyers have to brace up to pay more," Pankaj Kapoor, MD at Liases Foras, a real estate research firm, told Firstpost. He further argued that the state government should have increased the RR rates if property was selling at the current market rates. " But if prices are not selling even at this rate, an increase in RR will only hurt demand and increase the cost of construction, leaving no margins for realtors," said Kapoor.
While new supply continued to pour into the market, sales have actually  declined and remained subdued, resulting the inventory to swell from 16,600 units  in 2009 to 53,856 units as of September 2014, showed data from Liases Foras.
With three times the increase in inventory since 2009, sales in Mumbai and MMR have come down to almost half. "The city that has a shortage of 2 million houses but can't sell more than 10,000 units despite having almost 4.5 years of inventory," said Kapoor.


Secondly, even though builders have been mandated to sell apartments on the basis of carpet area alone, the revenue department continues to charge stamp duty on the basis of built-up area. Property prices are set to rise further. Ashish Shelar, the city BJP chief, told The Economic Times that he was surprised by the extent of the hike, but rationalised it by saying that the government needs revenue. "It's a welfare state and if needed the government will take a call on these rates for the benefit of the common man," he told ET.
So while a hike in circle rates may be bad news for those who plan to use black money to purchase property, genuine buyers may benefit marginally as speculators will not find it easy to jack up prices in this market. In a bullish market, sellers can usually increase the asking price proportionately, but in Mumbai, the market is sluggish with a record inventory of unsold flats. This means builders are not in a position to increase the asking price to match the hike in stamp duties. Also, in the secondary market, property rates are way higher than even the revised rates in many localities. So the new RR will only push up prices, making sales tougher. Thirdly, the real estate sentiment index for the fourth quarter of 2014 prepared by Ficci and Knight Frank revealed that sentiment among builders, buyers and incvestors have dropped for the first time since the BJP-led government came to power. "Investor confidence has taken a hit owing to oversupply within the residential space Number of stakeholders expecting a price hike have also reduced by over 50% in Q4 2014 compared to the preceding period," the index revealed.
"The weeding out of black money in real estate causes the market to behave in a more rational manner when it comes to pricing of projects. 
Also, it makes little sense to view the added financial outlay as a wasted expenditure, as it is actually increases the investment value, and therefore potential resale value, of the property," said Rohan Sharma, senior manager, Research & REIS, JLL India.


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