March 29, 1999
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HOUSING Now Within Reach Great tax benefits, falling interest rates and crashing property prices offer a rare chance to buy a house. By Robin Abreu
The market was quick to respond to Sinha's initiatives. On March 8, the public sector HUDCO, which lends money to large housing projects, decided to enter retail housing finance. Sure enough, the entry of such a formidable competitor led to an immediate interest-rate reduction. On March 13, HDFC effected a one percentage point cut in housing loans across all slabs. Though the reduction may appear small considering the prevalent high rates of interest, even a one per cent drop could translate into substantial savings, depending on the amount and period of borrowing. Moreover, with a dominant player like the HDFC taking the lead (of the Rs 6,000 crore disbursed in housing loans in 1997-98, Rs 2,274 crore -- or 38 per cent -- were given by the company), most of the 10-odd housing finance firms are expected to match the interest rate reduction soon. "With the increased finance and lower interest rates, construction volume will go up and the quality of houses will also improve," says V. Suresh, chairman, HUDCO. All this should be music to the ears of those planning to own a house. In fact, housing companies are anticipating a flood of loan applications once all the budgetary proposals of tax exemptions are finalised and banks actually augment flow of funds to housing. "There will definitely be an increase in the number of loan applications because those eager to buy a house will grab the opportunity," feels Keki Mistry, executive director, HDFC. So far the biggest tangible gains are the income-tax exemptions proposed in the budget. Sinha has proposed raising the income-tax exemption limit for interest paid on housing loans from Rs 30,000 to Rs 75,000 per annum on self-occupied houses. In simple terms, it means that interest payment of up to Rs 6,250 per month will be deducted from taxable income in arriving at the total income-tax payment of an individual. The biggest beneficiaries of this will be those in the uppermost bracket of income tax -- those paying income tax at the highest rate of 33 per cent. For instance, if an individual with a taxable annual income of Rs 2 lakh borrows Rs 5 lakh for a house, the annual interest outgo at the rate of 15 per cent would be Rs 75,000. The taxable income of Rs 2 lakh qualifies the individual to the 33 per cent tax bracket. With interest payments of Rs 75,000 tax deductible, the annual tax outgo would come down by Rs 24,750. This tantamounts to paying Rs 24,750 less as interest on housing loan. The effective rate of interest on the Rs 5 lakh loan works out to a mere 10 per cent per annum. "The repayment capacity of the individual will increase, enabling him to avail of a higher loan," says Mistry. The drop in the interest rates and the tax benefits are not the only good news. In its credit policy review for 1999-2000 in mid-April, the RBI will direct the commercial banks to increase their allocation to housing-sector loans from 1.5 per cent of their incremental deposits to 3 per cent. In the first 10 months of 1998-99, the incremental deposits of commercial banks were about Rs 90,000 crore. That means banks would disburse an estimated Rs 3,000 crore in housing loans in 1999-2000. Realtors too are expecting better days. "Investors are coming back into the market. The renewed confidence is the first ray of sunshine on the beleaguered industry," says Irfan Razack, managing partner of the Bangalore-based Prestige Properties Construction. There's yet another good reason why investing in a house is a sounder proposition today than ever before in recent years. Over the past four years, property prices across the country have come down to realistic levels (see table). In Delhi alone, between 1995 and 1998, the price of prime commercial property fell by 48 per cent while that of residential property fell by 30 per cent. Says Akshay Kumar, CEO of real estate consultancy firm Colliers Jardine: "Prices have corrected during the past four years." So are the lower interest rate and taxes, higher flow of funds and bottomed-out property prices prompting people to realise their housing dream? Some individuals in metros are surely excited. Mumbai-based advertising executive Maya Shastri, 34, is on cloud nine. With a monthly salary of about Rs 18,000, she had no hope of buying a flat and was resigned to living in a rented apartment which cost her Rs 6,000 a month. But not any more. A back-of-the-envelope calculation made Maya realise it now made more sense to buy a flat. A reasonable 560 sq ft flat that was priced at Rs 15.6 lakh (Rs 2,800 per sq ft) in 1996 is now selling at Rs 10 lakh. She plans to take a Rs 6 lakh loan from hdfc and borrow another Rs 4 lakh from her parents to buy the flat. Maya would hardly feel the pinch when she pays the equated monthly instalment (EMI) of Rs 8,400 on the loan (at the interest rate of 14.5 per cent on reducing balance for 15 years). The income-tax benefit on her interest payments would bring down her tax outgo. "With almost the same payment as my monthly rental, I could be living in a house of my own," she says gleefully. The dreams span the income spectrum. Arvind Sharma, a 33-year-old technician working for the Mumbai Port Trust and earning a modest Rs 7,800 a month, is also optimistic that he will now be able to afford a house. He is considering a Rs 3 lakh loan for 15 years to buy a 440 sq ft flat in a Mumbai suburb. At 14.5 per cent, that loan would entail a monthly instalment outgo of Rs 4,200. "For years I dreamt about moving from my quarters to something more spacious. But the high interest rates would have eaten up my entire salary," he says. Much as the budget may have done to revive the housing industry, some legal wrangles may continue to hold an outright boom in real estate. For starters, the repeal of the Urban Land Ceiling (Regulation) Act -- or ULCRA -- by the Central Government will have a minimal effect on property prices outside Delhi because states are yet to abolish their urban land ceiling laws. Until all the state governments repeal or amend urban land laws, the lofty projection that the abolition of ULCRA will make 22 lakh hectares of land available for real estate development will fall flat on its face. Secondly, the rent control and tenancy laws are yet to be amended. Despite repeated efforts, the pro-tenant lobby has managed to block the passage of the Delhi Rent Control Bill for five years. Also, Sinha will have to live up to his promise of enabling the development of the primary and secondary market for housing mortgages. As economist S.L. Rao says, "For a holistic solution to the problem of urban housing legal reforms must proceed in tandem with fiscal incentives." The budget has clearly made owning a house easier for the middle class. By taking the follow-up measures as well, the Government could turn the excitement building up in the real-estate market into a construction boom that would create houses, generate employment, enhance incomes and help revive the economy. |
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Too much, too fast and
perhaps too good. That's what the beleaguered housing industry has been witnessing of
late. First, the budget unveiled on February 27 proposed unprecedented income-tax benefits
for people who take housing loans. That would bring down the cost of financing a house. To
tackle the other big problem -- the availability of funds -- Finance Minister Yashwant
Sinha prodded commercial banks to double their lending to the housing sector. Also on the
anvil are a slew of legal reforms to make transfer of property and housing mortgages
easier. Comments Richard Cromwell, senior manager, HSBC, a financial conglomerate that
also provides housing loans:"There is a desperate need in the market for home loans.
With so many positive factors, the deluge of demand is about to start." 
