Weeding out black money from real estate: What government should do to make housing affordable
The Real Estate Regulation Bill is a first step towards that
Nov 02, 2014
Source : The Economic Times
Real Estate


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.


Latest Realty News

194 million sq ft Grade A office space expected to be absorbed in India’s top eight cities
Nov 02, 2014
MUMBAI: Around 194 million sq ft (MSF) of Grade A office space is expected to be absorbed in India's top eight cities between 2014 and 2018, said a report released by global real estate consultant, Cushman & Wakefield
After foreign equity, realty industry needs funding reforms
Nov 02, 2014
More reforms to boost credit flow are needed to provide a long-term solution to the funding crisis faced by the realty industry
Land of 3 Ponzi companies seized
Nov 01, 2014
BHUBANESWAR: Khurda district administration confiscated properties of four Ponzi firms in Khurda and Tangi tehsils
FIR against realty firm for cancelling flat booking
Nov 01, 2014
NOIDA: An FIR has been filed against a real estate company for allegedly cancelling a flat booked by a lawyer in Sector 119
Realty firm's boss held for 1,000cr fraud
Nov 01, 2014
NEW DELHI: The managing director of Vigneshwara real estate group has been arrested by the economic offences wing (EOW) of the Delhi Police
Housing scheme launched
Nov 01, 2014
Guwahati: Assam chief minister Tarun Gogoi today launched a scheme for constructing 50,000 houses under Indira Awas Yojana
DDA housing draw delayed, to be held on Nov 10
Nov 01, 2014
New Delhi: The draw of lots for the Delhi Development Authority’s (DDA) housing scheme 2014 will now be held on November 10
Housing prices rise in 18 cities by up to 3.9 pc
Nov 01, 2014
New Delhi: Housing prices appreciated in 18 major cities by up to 3.9 per cent in April-June over the preceding quarter while property rates fell in six cities including Delhi, according to National Housing Bank
Finish existing projects before starting new ones, builders told
Oct 31, 2014
NOIDA: Real estate body Credai on Thursday said it has urged builders in NCR to not launch new projects before completing existing ones
Land pooling is against SC ruling: CPM
Oct 31, 2014
GUNTUR: Coming down heavily on the State government, CPM affiliated raithu sangham has said that the entire process of land pooling is against the Supreme Court (SC) directives and norms of Land acquisition Act

Latest Realty News Of State

Realty Talk's