Body Blows to Housing Affordability in 2022
– by Akash Pharande, Managing Director – Pharande Spaces
The real estate market has experienced one shock after the other in quick succession. In Maharashtra, the added 1% metro cess and disproportionate rise in ready reckoner rates come at a time when developers are left with no option but to increase their property prices because of the steep increase in construction and other input costs.
During the entire course of the Covid-19 pandemic, prices were kept unchanged so that the returning demand was not discouraged.
Like in every business, real estate developers need to maintain some level of profitability. Without an acceptable profit margin, no business can survive. Developers cannot build real estate at a loss or even just breaking even. The main incentive for continuing in the real estate business is to remain viable now and in the future. Profits are necessary to keep the business operational.
Also, without an acceptable profit margin, developers cannot maintain a steady supply of housing projects. When supply drops, prices increase, and fewer buyers will find home buying attractive. When this happens, developers’ business obviously suffers – but so does the government because stamp duty and registration changes constitute a significant source of income for the state government.
Likewise, banks and other lending institutions lose business because of reduced home loan demand. This also affects government revenues because 12 of the leading lending banks are owned by the government.
Therefore, it is difficult to justify the government’s policy changes that add additional burdens on developers and homebuyers. We have seen a significant change in how the government seems to view real estate, from treating housing as a social need to treating it purely as a revenue spinner.
It is hard to imagine how the dream of Housing for All can be achieved when the government actively makes home buying less instead of more affordable. In Maharashtra, there appears to be a big disconnect between the Central Government’s vision and the state government’s actions.
Obviously, these untimely and excessive increases in statutory costs are motivated by the increased demand for housing since the pandemic began. There is a shortfall in other revenue streams, so the intention is to compensate for the losses by cashing in on this demand. But now, the proverbial goose that lays golden eggs for the government is being slaughtered.
Because of the artificial spiking of the cost of construction materials, CREDAI has been actively petitioning the government to intervene and end the cartelisation of steel and cement manufacturers and other suppliers of critical construction materials.
During the worst parts of the pandemic, there were disruptions in transporting these construction materials, and temporary increases were expected. These issues no longer exist, but the prices of construction materials still keep on increasing. Baseline inflation is already putting excessive pressure on people’s household budgets, and the market cannot accommodate the increasing statutory costs of property purchase.
That too, at a time when more Indians than ever before want to safeguard their families with the security of homeownership.
Real estate developers had been accused of passing on every additional cost to their customers in previous years. But over the past 3-4 years, developers have been shouldering the entire burden of inflated input costs, with many even absorbing the stamp duty costs so that demand remains healthy.
Now, with stamp duty charges skyrocketing on top of a 35% increase in construction costs, this is no longer possible. While homebuyers can still negotiate with developers, nobody can bargain with the government.
At the end of the day, developers are in the business of real estate, which contributes 7% of the country’s GDP. Across the globe, governments support important industries so that the country can prosper.
Housing has always been a critical need in India, never more so than today. We have seen the Indian government step in when pharmaceutical companies attempt to profiteer on essential medicines, and it keeps a cap on food grain prices. Real estate deserves the same consideration.
The Indian real estate sector continues to have faith in the government and hopes to have it as a supportive partner in fulfilling the dire need of providing housing at affordable prices. Housing for All may or may not be achievable this year, but it is an attainable target if real estate developers and the government work together to accomplish it.
This is the time to take all necessary steps to ensure that people can continue to buy homes.