Covid impact on real estate and how Budget can help revive the sector

The real estate market has faced several disruptions in the past few years. Demonetisation pushed demand off the cliff in 2016. The sector had barely recovered when the GST rollout and introduction of the Real Estate Regulation Act kicked in. In March 2020, real estate developers were sitting on inventory that would take roughly 15 quarters to clear.

Covid only made things worse for the sector. The lockdown resulted in a sharp drop in demand for property, which in turn brought down prices across segments and markets. By September, the number of quarters required to clear unsold real estate inventory had shot up to 19 quarters.

Though things are looking gloomy for sellers, this is a golden opportunity for home buyers. Desperate builders and stressed borrowers are trying to lure buyers with freebies and low prices. What’s more, home loan rates have fallen below 7% ; that’s the lowest in past almost two decades. The tax breaks on the interest bring down the effective rate to less than 5% in the highest 30% tax bracket.

In this Covid-hit market, purchasing a house for self use is a good idea but do reassess your requirements before you seal a deal. The Covid-induced changes may have altered some of your assumptions. Owing to the work-from-home regimen, and online classes for children, your family might need larger accommodation than what you may have earlier estimated.

Buying for self use is a good idea, but if your intention is to invest in real estate, the investment may not work out as expected. Property prices are no longer doubling in value every few years. The economy has slowed down and nobody can predict when normalcy will kick in.

To be fair, the government has taken several steps to boost the real estate sector. Taxpayers can claim deduction of up to Rs 3.5 lakh for the interest paid on a home loan. There’s also an interest rate subsidy for middle and low income borrowers under the Credit Linked Subsidy Scheme. Some states have reduced the stamp duty on real estate transactions while the Centre has lowered the GST rate. The government has also set up a Rs 25,000-crore stress fund for unfinished projects. But more needs to be done and the upcoming Budget can fix some of the issues facing the sector.

For one, the validity of the additional deduction of Rs 1.5 lakh under Section 80EEA is due to end on 31st March 2021. This should be extended indefinitely. Furthermore, the deduction is available to first-time homebuyers only, and that too with loans of up to Rs 35 lakh provided the value of the house does not exceed Rs 45 lakh. Additionally, the size of the house should not exceed 60 sq m in metros and 90 sq m in other towns and cities.

While this additional deduction aroused interest among buyers, the restrictions on price and size of dwelling have narrowed its appeal only to the lower slabs of the market. Hence the impact is limited to the affordable housing segment. If the government wants a secular rise in demand from buyers across all segments, the coming budget should not only extend the validity of the deduction but also remove the restrictions and offer it to all home buyers.

The budget should also review the deduction for home loan interest under Sec 24. The limit of this deduction was last revised from Rs 1.5 lakh to Rs 2 lakh in 2014. In the past six years, inflation has pushed up property prices across the country. Even a modest 2-BHK house in a metro now costs close to Rs 70-80 lakh. Assuming the loan will cover 75% of the value of the property, the buyer requires a loan of at least Rs 50-60 lakh. The deduction of Rs 2 lakh will not be able to fully cover the interest paid on such a loan and therefore the limit needs to be hiked to at least Rs 5 lakh, regardless of the price of the property.

The coming budget will be crucial. The focus of the government is to revive the economy and put it back on the fast track. Real estate has a ripple effect on other ancillary sectors. The purchase of a house leads to demand for several other items, including paints, furnishings, consumer electronics, electrical equipment, etc. Therefore, any step that pulls real estate out of the doldrums also has the potential to revive the overall economy.