The residential sector witnessed a strong comeback in 2021, with housing sales in the top 7 cities rebounding to 90% of pre-COVID levels and new launches reaching 2019 levels. While the housing sector's prospects generally look upbeat in 2022, it remains to be seen to what extent, if any, the new COVID-19 variant Omicron impacts real estate activity.
So far, it has not had any seriously dampening impact. However, the sentiment revival in residential real estate during the worst parts of the first and second waves hinged heavily on policy support. The RBI and the government have proactively aided the sector with various demand boosters. The stamp duty cuts, tax benefits extension on affordable housing in last year’s budget were strong moves that made a difference.
Despite rising inflation, the RBI kept the repo rates unchanged for the last nine consecutive bi-monthly monetary policies, thereby extending the benefit of lower interest rates to homebuyers. These measures helped the housing sector, which plays a significant role in the overall economy, to maintain an even keel during a very rough phase.
The residential sector looks forward to further support beyond the mainstay demands of industry status, easy availability of finance, and GST rates reduction. With regards to the upcoming Union Budget 2022-23, some of the significant moves which would help spur up residential demand include:
- Home loan deduction limit (u/s 24)
There is a need to hike the INR 2 lakh tax rebate on housing loan interest rates under Section 24 of the Income Tax Act to at least INR 5 Lakh. This could instantly infuse robust demand for housing, especially in the affordable and mid-segment categories.
- Deductions for home loan principal repayment, over and above the existing 80C
Personal tax relief, either via a cut in tax rates or revised tax slabs, would be a welcome move - especially since the last increase in the deduction limit under Section 80C (to INR 1.5 lakh a year) took place in 2014. The time is certainly ripe for a further upward revision, but there is no denying that the government currently lacks the elbow space for such a move. Instead, it may focus on providing more incentives to MSMEs and SMEs struggling post the pandemic. Also, the government spending on infrastructure may further get a boost.
- Redefine the definition of affordable housing criteria to extend the benefit of additional deductions to more buyers
According to the Ministry of Housing and Urban Poverty Alleviation, affordable housing is defined based on the property size, its price, and the buyer’s income. For instance, affordable housing is a unit with carpet area up to 90 sq. m. in non-metropolitan cities and towns, and 60 sq. m. in major cities and valued up to INR 45 lakh for both. The central bank’s definition, on the other hand, is based on the loans given by banks to people for building homes of buying apartments.
The government should seriously consider revising the city-wise pricing parameters to include a broader customer base under the benefits of extended to this segment. While the size of units as per its definition (60 sq. m. carpet area) is relatively appropriate, prices of units (up to INR 45 lakh) are not viable across most cities. For instance, a <INR 45 lakh budget is far too low for a city like Mumbai - it needs to be increased to at least INR 85 lakh.
As for other top cities, the budget range should be increased to at least INR 60-65 Lakh. With this price revision, more homes will fall within the affordable price tag, allowing more buyers to avail of multiple benefits like lower GST rates at 1% without ITC, government subsidies, and the tax deduction of a total INR 3.5 lakh on interest repayment of home loans.
Also, more government-controlled land needs to be unlocked to create affordable housing. Some portions of land across cities falling under the Department of Heavy Industries, Indian Railways, Port Trusts, etc., can be released by respective government bodies. Increased availability of low-cost land will also help rein in property prices significantly.
- Extend benefits of Affordable Housing
Affordable and rental housing got a big boost in the last Union Budget, with the government extending the period for extra deduction of INR 1.5 lakh for loans up to 31st March 2022. A further extension of this benefit will ensure buoyant demand for affordable housing in 2022. Further, extending the tax holiday for affordable housing projects by another year will help bring in more new supply within this segment. As per ANAROCK Research, affordable housing in 2021 accounted for approx. 26% of the overall supply across the top 7 cities. Tax exemption for ARHC will also help stave off labour shortage challenges in case of any future disruptions.