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    How better home loan benefits can boost the post-pandemic economy

    How better home loan benefits can boost the post-pandemic economy

    How better home loan benefits can boost the post-pandemic economy
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    By CNBCTV18.com Contributor  IST (Published)

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    With the real estate sector in India expected to reach $1 trillion in market size by 2030, the Budget could provide incentives to citizens to make investments in real estate.

    In India, when traditional households think about investment, they think of either real estate, gold or mutual funds. It’s no surprise then that the real estate sector in India is expected to reach $1 trillion in market size by 2030, up from $200 billion in 2021 and contribute 13 percent to the country’s GDP by 2025.
    Given the vast potential of this sector, it makes sense for the government to incentivise citizens to make investments in real estate. Most potential buyers are faced with financial challenges due to the pandemic, which could be hugely alleviated with higher home loan benefits, and Budget 2022 being round the corner, provides the perfect opportunity.
    Existing limits on home loan benefits
    The Pradhan Mantri Awas Yojana (PMAY) has envisioned 'Housing for all'. It sought to address the urban housing shortage among the economically vulnerable lower-income and mid-income groups and ensure a 'pucca' house for urban households by 2022. However, the pandemic has led to an interruption in achieving this target. In urban areas, less than 50 percent of homes were sanctioned, amounting to 1.7 crore homes compared to the originally committed 2.9 crore.
    As a part of PMAY, the Credit-Linked Subsidy Scheme (CLSS) gave home loan borrowers subsidies of Rs 2.67 lakh. However, we now need better and more benefits to re-build the momentum. The National Real Estate Development Council (NAREDCO) has even called for a no cap limit on the interest subsidy of home loans.
    The ₹45-lakh upper limit on home loan doesn’t permit borrowers to claim the total ₹3.5 lakh exemption in the current home loan tax benefits. The existing paradigm requires that home buyers take a 90 per cent loan on a residential
    property valued at ₹45 lakh for 20 years at an interest rate of 9 per cent. Only then can the new home loan borrower be able to use up the limit of ₹3.5 lakh deduction completely.
    For context, prevalent interest rates on home loans are around 7 percent. And even though the size of units as per CLSS definition (60 sq m carpet area) is appropriate, their prices (up to Rs 45 lakh) are not feasible across most cities, mostly in metros.
    Pros and cons of increase in home loan benefits
    With higher benefits, more houses will become affordable and enable the economically impacted buyers to take the purchase decision. Home loan interest rate deductions and enhanced PMAY, plus tax benefits, will give the sector a much-needed boost. Real estate development plays a crucial role in job creation and economic recovery. At a macro level, an increase in the purchase of homes will result in increased demand and supply across industries and impact overall labour workforce. A positive policy framework will only increase real estate investments in the mass segment, thus driving an increase across state and federal taxes. The recent reductions in municipal taxes and stamp duty rates in Maharashtra hold testimony to the positive impact such measures can augur. Tax and regulatory incentives that enable real estate investments, including measures to support developments in tier 2 and tier 3 cities, and measures to decongest existing cities, by enabling additional benefits for developments in metropolitan regions can play a critical role in providing balanced growth and density.
    Policy interventions to boost real estate sector
    In India, tier 1 cities remain a top choice for real estate investors. During Covid, the unsold stock of real estate fell by 7 percent (till March 2021) and residential sales increased by 9 percent compared to the
    previous year.
    Some tier 2 cities are also becoming quite attractive, with an increasingly younger workforce brought about by reverse migrations led by WHF, who are now enjoying the benefit of higher salaries.
    These could be first-time buyers, who would invest in their hometowns, with better or more impetus from the Finance Bill. Unfortunately, the process for accessing a home loan for tier-2 cities still remains tedious and the housing finance process needs be further streamlined to make home loans more accessible across towns and cities.
    The Finance Bill can also play a substantial role in improving NRI investments in real estate, as total remittances have taken a beating during Covid, and global markets have attracted investments in other asset classes through the easy monetary policy period. By incentivising NRI investments in real estate, especially in products like urban rental housing, investments in housing for the urban poor can be supported. NRI investment in real estate already stands at $13.3 bn and policy benefits during uncertainties induced by the pandemic can help expand the investor attractiveness.
    The government needs to realise that the lower slabs of home loan benefits (be it for PMAY or income tax slabs) may not currently do justice to the diversity in costs and a regional or even a municipal level think-through with a differentiated approach for property sizes and costs may be required. An immediate implementation of better and differentiated benefits could lead to
    substantial demand generation, as a large number of people are still fence sitting, even with the prevailing lower home loan rates.
    –Avishek Banerjee is the founder of Upcide.com. Views expressed are persona.
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