India has till 2007 seen a fair breakup of physical and financial savings at household level split evenly between physical (gold and real estate) and financial savings (mainly bank deposits). The trend took a turn in 2009 as government panicked post Lehman crash and pumped lot of money into the economy leading to high inflation in capacity constrained environment. Inflation spiked but RBI never increased the interest rates high enough to counter inflation. high inflation coupled with substantial increase of high denomination old notes (500 and 1000) in circulation led to two important trends
1. Overall savings started dropping
2. Financial savings losing ground to physical savings as inflation reduced the value of money and Indians being smart to maintain the value of money bought land and real estate. By 2013 at household level physical savings constituted 72% and financial savings came down to 28%.
Then Dr Rajan became RBI governor in 2013 and the first thing he did was to target inflation. Low inflation coupled with high interest rates to compensate savers for loss of purchasing power led to moderation in real estate price appreciation and start of shift to financial savings as money was not losing value anymore. But, what to do of black money which was sloshing in this industry? govt has come out with various measures over last couple of years to eliminate black money and most will agree that it has reduced substantially in all property transactions. So as chuck prince said, When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. The music has stopped and with the measures announced in this budget the door to get out of the party has also closed.
Manish bhandari of valuenomics was the original bear of real estate way back in 2013 valuenomics-real-estate-2013
and this is what he had to say
The theme played out this budget has been stringent measures are the final nail in the coffin to deflate real estate prices. The Finance Minister has broken the malaise of closed loop of circular money circulation in Real Estate sector (sale of one real estate proceed going to purchase of another real estate to save capital gain) or sometimes half-heartedly trickling to NHAI/REC bonds with 3 years of lock in. It is noticeable that physical assets (Real Estate, Jewellery) accounts for 50% while equity allocation is less than two percent of households assets This is done by following policy measures:
Lowering the capital gain years threshold to 2 years for claiming capital gains, signal’s a genuine attempt to encourage people to exit their real estate holding at much faster pace than before and alternatively find more productive other investment avenues.
The budget has indicated that many more bonds will be opened to channelize money in financial instrument from sale of real estate proceeds. This will encourage big financial migration from the sector where investors are getting dissuaded by low investment returns over last two years.
Last attempt, in form of tax rebate for one year by persuading builders to liquidate inventory over one year cycle after receiving commencement certificate in order to augment supply in the system.
However, the final straw on investors back is limiting notional loss from house property to Rs 2 lacs per annum instead of unlimited tax shield created by misguided policy under Sec 71 of IT Act. I have written about misuse of this policy on various occasions as property investors have crowded the property markets for the last decade, pushing actual user far off. Now, this will push HNI investors out of property market for years to come. To my belief, no policy measure will have such a far reaching impact on driving down property prices than this one.
These stringent measures will have long term repercussion resulting in lower land prices, enhancing supply of land in the system and dissuading investors from hoarding of land, apartments.
Now the question remains why government has chosen to remain silent about taxation on Long term capital gain, despite the loud roar of our Prime Minister, in Jan 2017 at Mumbai. The answer lies in scanning through the recent history of Divestment program of the Government. We are running an ambitious divestment target (Rs 72,500 Crs.) and it was necessary to cheer the mood and set the stage right for the financial markets.
The byproduct of this exercise is an avalanche of investment flow into financial markets especially equities where tax incidence in long term capital creation is Nil. I have spoken about impending households savings to financial assets on various occasion, the policies in this budget has expedited the financial migration process.
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