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Add comment   |   November 4, 2014    11:16pm   |Contributed by Indian Realty News

Weeding out black money from real estate: What government should do to make housing affordable

I recently met a real estate developer who joked that the engine of real estate in India has two wheels: one is white money that comes from genuine buyers and the other is black money. And, currently, both wheels have stopped turning. He wasn’t joking.

Today, the market is stagnant because most genuine buyers can’t afford to buy their dream home as the market is overpriced. The investors who were pumping in black money have also paused as prices have stagnated.

Curiously, the escalation of prices itself has happened because of the large inflows of black money into realty. Even though no official figures are available, it is safe to assume that anywhere between 30% and 40% of real estate transactions — be it the purchase of land or an apartment in a metro — involve black money.

Of course, higher the price tag of an apartment, bigger is the black money component. For instance, there is hardly any black money involved in an apartment priced between Rs 15 lakh and Rs 20 lakh but in a luxury apartment priced above Rs 3 crore, the black money component could go up to 60%.

Chain of Transactions

So, where does the problem start? It starts right at the time land is purchased, let’s say for the construction of an apartment. In a city like Mumbai, virgin land isn’t available. So, invariably developers have to buy land in outskirts or villages outside the city limits, where the ready reckoner rates (or circle rates) are low.

Often, the people who own the land ask for a significant part of the payment in black, sometimes as much as 25-30%, so that they can avoid getting taxed. The next step is getting approvals, which invariably involves getting building approvals from local civic bodies which in turn are controlled by politicians and bureaucrats. That again involves significant amount of unaccounted money.

All these underthetable payments mean that a developer has to have a significant kitty of black money. So, the developer starts putting price tags on things he isn’t legally allowed to sell, parking in apartments, for instance. It is this chain of black money transactions that has raised the launch prices of apartments, resulting in the fact that most genuine buyers can’t afford a home.

The only ones who can afford a home are, unfortunately, not the salaried class but traders and other dubious buyers who have a steady flow of black money. Given that Indian tax norms favour people who are buying a second or third house more than a first-time buyer, most people who can indulge in inflated real estate transactions are investors who have black money. They have unyielding capital that they choose to park in real estate.

Between 2001 and 2005, real estate in India boomed. Interest rates were low, housing was affordable and first-time buyers were entering the market. One could understand a bump-up in prices then. But between 2009 and 2013, something strange happened. Despite the fact that there wasn’t a great wave of buying from first-time buyers, prices went upwards sharply. Most of this was fuelled by investors who invested in the premium and luxury segments and most of them involved black money transactions.

Slew of Reforms Needed

State governments have responded by reducing ready reckoner rates to almost the same level as market value but that alone hasn’t been enough. If the government is serious about achieving its stated goal of housing for all by 2022, then it will have to make a few systemic changes. One, incentivize first-time buyers.

Two, make the process of getting approvals transparent. Make the process automated. Cut off all political discretions when it comes to granting approvals or buying land.

The Real Estate Regulation Bill is a first step towards that. But in its current form, there are some loosely defined terms in the draft and oversights which can be misused. For instance, approval authorities are not brought under the purview of the Bill. Most delays of housing projects happen because of delayed approvals.

India has a shortfall of 18.7 million homes — over 95% of this is in the economically weaker section. Only 1.4% of that demand is being met. If we want India’s real estate sector to blossom again, this menace of black money needs to be weeded out.

Source: ET

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