Blame the Government for Real Estate Mania

The best way to dampen real estate spiral is to make capital gains on real estate compulsory and not provide any kind of exit routes. After all why should reinvestment back in to property save you capital gains tax.

When you purchase shares of Tata Steel, and sell it for a profit, you pay capital gains tax on that transaction, whether or not you reinvest the money in to Infosys or not. So, why should a person selling his apartment in Mumbai be allowed to save tax, but only if he reinvests the proceeds in to an apartment in Bangalore?

The Indian government is guilty of keeping an excessive real estate spiral in place. It has kept the real estate boom going, by providing an exit route for real estate investors, via reinvestment in property.

In order to save capital gains tax on property the government says that you can reinvest the money within one year in to real estate and avoid payment of capital gains tax. Alternatively, you lock this money in to a capital gains bonds, which pays you 5 percent each year, for the next five years. At the end of the tenure the capital and the interest becomes tax-free. The capital gains on real estate is taxed at 20 percent for long-term capital gains and 30 percent for short-term capital gains.

Who picks property at Rs 2 per square feet and sells it at Rs 2000 per square feet. It is none but politicians, especially those who are in power. The Indian government has perpetuated a constant stream of investment in real estate by introducing this exit on capital gains.

As Sam Zell said, there is no shortage of land in India, but there is shortage of zoned land, which means land freed for real estate development. This land is controlled by the government. Zoned land is never made available to individual home buyers.

Why is it, that people who can pay Rs 30,000 per square feet for an apartment are not allowed to pay Rs 17,000 per square feet for land, on which they can build their own homes.

The government's job is to focus on creating new cities, by providing infrastructure (excuse this buzzword) - in simple term, water, electricity and roads. Instead, politicians focus on acquiring cheap land, doubling FSI, and selling them at profits that even the stock market cannot provide. This is why real estate is such a darling of the chosen few in India.

Thus, it makes sense, that when one votes, it is always in the best interest of the people to ensure that one single party never remains in power for more than one term. If it is a choice between theivves, the best thing a voter can do is to divide the spoils and exercise at least one wee bit of control over the overall process.

Always vote out the incumbent government, and bring in a new one. This is the sanest thing to do. Irrespective of what the party stands for, just make sure they do not rule for more than one year.