Economic Survey 2017: Updates On Property Pricing, Cheaper Loans, And More

Prime Minister Narendra Modi's demonetisation move and its likely impact were the key themes when Finance Minister Arun Jaitley presented the government's Economic Survey-2016-17 to the floor of the House on January 31. This annual document, which sums key economic developments over the past one year, reviews the performance of government programmes, highlights key policy changes and forecasts economic growth, has demonetisation written all over it.

From the economy to the real estate sector almost everything went inactive after the Centre announced a ban on high-value currency notes on November 8 last year.

The economic implications

No denying the fact that the pain has been intense.  Unsure of the future course of action on policy front, households and businesses put on hold their purchase decision, and that has caused a short-term trouble for the economy. The Survey says that a contraction in cash supply and a slowdown in growth are "short-term costs" that would give way to "long-term benefits", including increased digitisation, greater tax compliance and a reduction in real estate prices. These, in turn, will "increase long-run tax revenue collections and GDP (gross domestic product) growth". Demonetisation's adverse impact on the economy is "transitional", says the Survey, adding that once the cash supply is replenished, the economy would revert to normal.  For the financial year 2017-18 (FY18), the economic growth is pegged at 6.75-7.5 per cent.

What about real estate?

To increase the benefits of demonetisation, the government should quickly remonetise, bring real estate under GST's (Goods and Services Tax) ambit, reduce taxes and provide a stable tax regime, Chief Economic Advisor Arvind Subramanian has written in one of the chapters. The cash squeeze, the government hopes, will be eliminated by April this year, and things will improve from thereon. 

What else is predicted for the sector?

Prices to fall

The Survey says that the weighted average price of real estate in eight major cities, which was already on a declining trend, fell further after the government announced its note ban move. Prices will fall further, it is noted, "as investing undeclared income in real estate becomes more difficult". This will largely impact secondary market where cash component was driving prices up. Primary sales with accountable income will remain stable. The resale market, according to latest reports, has already seen a 20-30 percent drop in prices. It is unlikely to fall further as properties are now being sold at circle rate.

The Survey adds that an “equilibrium reduction” in property prices is desirable. It will help provide affordable housing to the middle class and facilitate labour mobility across India.  According to the Survey, unaffordable rents have been hindering labour mobility.

GST may raise the buying cost

The Survey predicts that the tax component of house purchases could rise when real estate is bought into the fold of the Goods and Services Tax regime. It, however, hints that by reducing tax rates and stamp duties, affordability could be maintained.

Loan may get cheaper

The survey indicates loan rates could fall, if "the deposit increase seen after demonetisation proves durable". This would make housing more affordable.

Tax tools remain untapped

The Survey points out that the meagre earnings of urban-local bodies are a key reason behind the challenges every Indian city faces. By increasing their property tax collections, urban-local bodies could fight financial crunch effectively and work better towards improving a city's overall infrastructure.  Government studies show cities such as Bengaluru and Jaipur are currently collecting only 5-20 per cent of their respective potential for property tax. Use of satellite imagery could be promoted to ensure property tax compliance, the Survey suggests.