Monday, December 15, 2008

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.




Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book

everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror


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