Housing Is More Expensive When There Is Greater Uncertainty

Suppose you see a beautiful bag but don't know its cost. It does not have a price tag and the salesman is not willing to disclose the price before you promise to buy. You find it hard to reasonably guess how much it should cost. You are not likely to buy the bag because the risk is not worth it. It is important to understand this analogy to see why the demand for more expensive fully constructed apartments is much greater. But the Union Budget for 2016-17 has certain policies that make things easier for home buyers.

Finance Minister Arun Jaitley said in his Budget speech that home buyers would be able to benefit from tax waivers even if they received their flats much later. Currently, the tax waiver is for people who get their flats within three years from the date they become beneficiaries of housing loan. This will greatly benefit home buyers because most housing projects take more than three years to complete. In fact, this is one of the factors that make housing expensive.

Why so? The regulatory approval process can take three years or more. And, inflation is unpredictable. Though inflation has been in the range of one to three per cent in many developed countries, it has widely fluctuated in India in recent past. Not very long ago, inflation in the country was in double digits. And then consumer price index (CPI)-based inflation in July 2015 was as low as 3.78 per cent. When inflation is unpredictable, home buyers can't predict their ability to pay back their loans years from now.

When interest rates are fluctuating, it is impossible to predict how your equated monthly instalments (EMIs) will shape up in the future. The fact is that if interest rates fall substantially, you will be able to buy the same house for a much lower price, and vice versa. Fluctuating interest rates and inflation also make it more difficult for real estate developers to estimate their revenues and expenditure in the future. This tampers with the business calculation.

If you put yourself in the shoes of a home buyer and think when you will receive your flat, you will know it is not possible to say whether it will be a year, three years, five years, or even more. This is a situation where the probability of your flat not being delivered in time is high. There is a great variance in how much the possession of your flat is likely to be delayed. When this happens, home buyers might be quite willing to pay far more to handle with uncertainty.

So, though uncertainty in the policy atmosphere tends to generally lower the velocity of transactions, this tends to increase the preference people have for fully constructed apartments. But fully constructed apartments are more expensive than under-construction ones. To make housing affordable, government policy should address such uncertainty as much as possible.