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Real Estate Industry Crumbles After Demonetization

 

Introduction

When the government announced the demonetization of India on 8th November 2016. it was one of the great weapons in order to control black money But on the other side; it was a great sock for the real estate sector because it is criticized that most of the black money comes to real estate market. Because of demonetization, people are assuming that there will be a reduction in the rate of real estate market. So in this segment, we are going to discuss the impact of demonetization and after GST what is the current status of real estate after demonetization in India.

real estate after demonetization

Effect of real estate after demonetization

People were saying that real estate after demonetization the market will crash; but it was not true because we are experiencing that there is nothing like that. The main effect would be one the sector where cash money was in use like people used to deal with cash money on land. According to real setae research, there could be the effect on the resell market because there is cash flow. So there is no issue in the lower and mid segment. On the other hand, it was said that the rate of interest would be low; hence the builder could have a great opportunity to earn. Now if we talk about GST implementation by the Indian government on 1 July 2017, it was good news for real estate sector. Let’s see how GST is boon for real estate.

Bottom line: The effect of demonetization on real estate was it slow down the market. But side by side it reduces the inflation and was responsible to enhance the rental sector.

 

GST a boon or ban for real estate

Previously a person has to give two tax service taxes well as VAT tax. Service tax was dedicated to central government whereas VET was dedicated to state government and every state had its own VAT tax. But today there is only one tax GST in every sector. Let’s know some facts about GST on real estate market

  • Ready to move property GST is not applicable
  • On land and plot, GST is not applicable
  • Under construction 12% of GST is implemented
  • From 25 January 2018, on the affordable housing, 8% of GST is applicable

One of the boons of GST is on raw material there is low; because previously there was cascading tax system which was responsible to enhancement in tax but now there is only one tax GST.

Since the construction rate is going to be lowered because the goods rate is low, hence there will be more benefits for the builder.

Bottom line: there is the great impact of input tax credit for buyers. When builder gets the input tax credit from the government then he has to pass on the credit to the buyer as well according to government rule.

 

Conclusion

There is a misconception among people about the percentage implementation under GST. For example, previously a builder used to take 3.75% of total tax but now because of GST; one has to pay 12% of tax, which seems really high. But I would like to clarify that the 3.7% of tax was on total amount whereas 12% of tax is on raw material and services. We know that there is three factor in Real estate land on which there is no tax, goods or raw material on which there is 5% to 28% of tax depending upon which material you are using. And the last one is services which include the contractor, Architecture, CA etc. So in GST people have to pay the tax on goods and services only.

When Will Real Estate Values Begin to Appreciate Again?

Real Estate Values

This is the $64,000 question that real estate professionals, investors, and mortgage professionals would like to know. The truth is nobody can accurately predict the return of the real estate values market. Like everyone else, I can’t predict the end of this crisis either, but what I can do is tell you what will have to happen to facilitate that change. The answer is quite simple: America must reinvest in herself once again. Without an investment, real estate is as worthless as the Dollar is today.

Real Estate Values Begin to Appreciate
Think back, or read a history book, about how families in the ’40s and ’50s used to buy homes. Young couples lived with Mom and Dad during the “courtship” prior to getting married, until they had saved 20% to put down on their “dream home”. They made an investment in America, (i.e. the American dream). In the years that followed we have devalued that investment in lieu of credit and the easy access to it. Real Estate Values rose artificially and our nation became addicted to credit.

The value of the dollar has been demolished due to the same principle. When we place value in assets based on their ability to be easily bought and sold versus the value that has been invested in the asset, we devalue its worth. For example, two years ago I could have bought an $800,000 house (and I assure you that I cannot afford a house that expensive). The owner of that asset (the $800k house) placed value on his asset based on the availability of buyers like me who could buy the home. The problem is, this homeowner probably had less than 5% invested in the home. Where do you think that homeowner is today?

Real Estate Market

Had he put 20% down on his home, he would then own a valuable asset in which he has a real investment. This outlay of cash forces him to buy and sell his home in the same manner he would move an $800k investment around in the stock market very carefully. Thus, the home has REAL value. However, having bought the home with little or no money down, the asset became disposable and so follows the real estate market.

So, as I said earlier, I cannot predict when the real estate market will bounce back, but I can tell you what needs to happen before it does. America needs to reinvest in herself by getting back to solid buying and selling principles. This strengthens home values, which encourages investors who employ builders who employ carpenters, painters, real estate agents, loan officers and so on. America was built on the “American Dream” which has turned into the “American Nightmare”; she can only be rebuilt by hard working Americans, not by Wall Street.