Budget 2021: Five things the government can do to revive real estate

It can and should do more than just spend, spend and spend.

ByVivek Kaul
Budget 2021: Five things the government can do to revive real estate
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It is that time of the year when anyone who makes a living by writing about economics and finance in India spins out a few hundred words at least, advising the finance minister on what needs to be done in the budget of the central government for the next financial year.

This year, due to the negative economic impact of the coronavirus pandemic, many columnists, economists, journalists and analysts have been asking the finance minister to spend, spend and spend. The idea being that when the private sector (corporates and individuals) is not spending enough money, the government needs to become the spender of the last resort and rescue the economy in the process.

But spend, spend and spend, without being specific, is nothing but lazy thinking. Rest assured, most of my ilk including me have been guilty of this over the years.

Hence, this year to set things right, I thought let me be a little more specific and talk about five things that the government can do when it comes to the real estate sector.

Let’s look at this pointwise.

1) One, the issue plaguing real estate in India is the large number of locked homes. People buy homes which they don’t live in and keep them locked. In a country like India, this is criminal. By buying a home one has no plans of living in and then keeping it locked, so much money is wasted in a capital deficient country. A locked house is of no use to anyone.

In the past, suggestions have been made about taxing owners of locked homes on a notional rent. I don’t think that is the right idea. A better idea is to nudge people in the direction of renting out their homes. One way of doing it is to tax rental income at a lower rate than the marginal rate. Let’s say rental income is taxed at 10 percent, this might just give an incentive to more people to open up their homes and rent it out.

This will have multiple benefits. With more homes available on rent, many people will be rescued from the pressure of buying a home in these tough times, making their lives a tad easier.

Second, data clearly shows that by taking payments in cash, many landlords don’t declare their rental income as income. A lower rate of tax might just encourage them to declare the income and pay a tax on it, helping push up tax collections for the government.

Third, with more homes available on rent, rents are likely to come down, pushing down the rental yield. A lower rental yield will mean even less incentive to buy a new home, forcing builders to take a relook at home prices, which they haven’t done seriously up until now.

Of course, this can be reviewed once data for a couple of years is available.

2) In cities across the country, the central government owns land, directly and indirectly, through public sector enterprises and other agencies. It doesn’t use a lot of this land.

There has been some talk about an inventory of this land being made. It is very important to hasten this process. Further, the government should initiate the process of selling this land. This is not something that will take off smoothly given that such an attempt has never been made before. Hence, some trial and error will be involved. Other than generating revenue for the government, it will also lead to the price of land in cities, which is a key input in building new real estate, coming down.

3) A key gap in the real estate sector in India is the lack of good publicly available data. In the United States, housing starts is a key economic indicator which points out the number of privately owned new homes where construction has started during a particular month. With every state having a real estate regulator now, it is possible to generate such a statistic in India as well. With builders having to compulsorily file the details of every new project, India is now in a position to declare a similar economic indicator.

The government needs to depute one of the many think tanks it owns or finances, in Delhi, to get around to doing this. Over and above this, the central government also needs to agglomerate the data on home sales on which stamp duty is paid to state governments all across the country.

These statistics will emerge as key economic indicators over a period of time, simply because a home is the costliest thing that an individual buys during the course of his life. So, if the registrations of home sales are going up, it will clearly tell us that individuals are feeling more confident about their economic future. Only when one is feeling confident about one’s economic future does one take on a home loan or make a large down-payment, which is required to buy a home.

Finally, the government also needs to ask the Reserve Bank of India (RBI) to publish more details on home loans on a regular basis. At present, the RBI publishes the outstanding home loans of banks at the end of a given month. We also need data on the amount and the number of fresh home loans given by banks and housing finance companies, during the course of a month.

This hasn’t got anything to directly do with the budget, but given that many policy announcements are made at the time of the budget, it can be the case with these points as well.

4) For the non-salaried, the tax rebate on the house rent they pay is largely limited to Rs 5,000 per month or Rs 60,000 per year. This needs to change. As long as the rent is being paid through a bank transfer or a cheque, a full tax rebate should be available. The way the income tax law is structured on this issue, it discriminates against those who do not earn a salary or do not have a house rent allowance as a part of their salary.

5) Finally, the finance minister in her budget speech should encourage state governments to cut stamp duty on real estate transactions. Also, she should request state governments to reduce all other levies they implement on the building and selling of real estate. The increase in the volume of transactions is more than likely to make up for the fall in taxes per unit of home sales.

This should increase real estate activities across states and in the process create new jobs for the semi-skilled and the low-skilled, who have been badly hit in the aftermath of Covid. As Thomas Sowell writes in Controversial Essays: “When an investment is made…the first money is spent hiring people to do work. Without that, nothing happens. Money goes out first to pay expenses and then comes back as profits later.”

These are the five things that the finance minister and the government should do in the upcoming budget, to boost the real estate sector in the coming years. They are the need of the hour.

Vivek Kaul is the author of Bad Money.

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