That the property market has undergone a significant correction is well known. That real estate experts are now talking about prices bottoming out is well known too. But, contrary to conventional wisdom, experts are of the view that this may not be the right time to invest in residential property. And, their advice is for both first and second-time home buyers.
Consider this: A report from PropEquity, a firm that maintains data on real estate, said that in the first quarter of the current financial year, the Mumbai market saw an average correction of 42.84 per cent compared to the corresponding quarter last year.
According to another report by Centrum Broking on Maharashtra Chamber of Housing Industry’s exhibition, prominent developers such as Kalpataru, Lodha, Rustomjee and the Acme Group were quoting prices 20 per cent lower than their card rate six months ago. Godrej Properties had dropped the quoted price of its Mahalaxmi project (Planet Godrej) by 34 per cent.
Prices in other major metros too have seen a significant correction in the past six months, according to the PropEquity report. These include Gurgaon (24 per cent correction), Chennai (13 per cent) and Hyderabad (10 per cent) for the same time period.
If prices are lower, then why investment in realty is not advisable?
“To begin with, the yields of residential properties are low. They are between 3-5 per cent only,” says Hitungshu Debnath, executive director, distribution and wealth management, Angel Broking.
If you take a loan from a bank and expect the rent income to help you pay the equated monthly instalment, you will need to rethink the math, he adds.
“The rent income along with property appreciation will not be able to cover even the interest that the investor will pay for the home loan in the first few years. This is called as opportunity cost in real estate. To get good returns, the buyer will need to hold on to the property for a long time, probably till the loan is repaid,” says a property expert.
Experts also suggest that property prices are going to remain stable for at least two years, that is, if the correction stops.
“This is based on the supply that will hit the market in the next three years. An estimated 200 million sq ft a year will be available, considering the properties announced,” says Pranay Vakil, chairman, Knight Frank (India).
Not all the supply will be lapped up by the buyers immediately. This supply also means that the appreciation in the property value will be slow, he adds.
Then comes the taxation part. If the house is let out, then the rent income is taxable. It is combined with the person’s salary and charged as per the tax bracket.
The income tax department also charges wealth tax of 1 per cent on a residential house unless it is let out for 300 days in a year. This is applicable on the value of the house exceeding Rs 15 lakh (Rs 1.5 million). If the property value is, say, Rs 25 lakh (Rs 2.5 million), the wealth tax will be levied on Rs 10 lakh (Rs 1 million).
Also, if the person does not let out the property, the IT department takes a notional value of the rent that the property can fetch and taxes the owner accordingly.
If you buy it in the name of your family member, you will lose out on the tax deduction. “For a second house, a person can claim the entire interest as a deduction. In case of co-applicant, the deductions are in the same proportion as the funds deployed by each person,” says Kanu Doshi, a tax expert.
“A house for investment purpose will also skew the portfolio,” says Gaurav Mashruwala, a certified financial planner.
A major chunk of the portfolio will be real estate. This asset class is illiquid. If there is an emergency in the future, the entire house will need to be sold. A person can sell other investments in parts. The same is true when the person reaches closer to his goals for which he has been saving.
One can look at property only if they have excess cash and the property value is only a minor part of the investment portfolio, say investment experts.
But if you still not convinced and want to go ahead with the purchase, wait for another six months. “There will be some clarity on the economy as well as the real estate industry in this period,” says Vakil.