Home buyers - reasons to be upbeat

Home buyers woes:

For the past few years genuine real estate buyers have been facing a lot of inequities and injustice. Though most of us would be aware of these issues, some are recapitulated below for better understanding:

1.    Exorbitantly high prices in the land and secondary market segments, mainly attributable to the prevalent market prices being much higher than the circle rates fixed by respective local authorities. Through this modus operandi, the seller benefited by understating the prices in the sale deeds to cheat on capital gains tax and buyer would cheat on registration charges due on the transaction.

2.    Presence of dealers/ intermediates who would enter into transactions by paying advances and artificially inflating property prices by even entering into agreements to sell, between themselves and  then exit by selling the agreement rights, without taking delivery and pocketing the differential from such nefarious deals.

3.    Cash transactions, mainly involving black money were resulting in abnormally boosting up the prices of properties, mainly in the secondary market and to some extent in the primary market by unorganized and lesser known developers. 

4.    Benami transactions were rampant and substantially represented the ill gotten wealth of corrupt politicians, bureaucrats, businessmen and other black operators, resulting in many of these properties being inaccessible to genuine buyers.

5.    Many developers cornered/retained many unsold flats to artificially create shortages to jack up prices and then hope to unload it in future to make higher realizations. These tactics, when combined with a depression in the sector since 2013 has resulted in a minimal sale transactions of late and a huge pile up of unsold housing/flats inventory running into 6-8 lakhs in the metro cities alone. 

6.    Developers defaults: Several developers defaulted on committed delivery timelines and in many cases diverted advances received from buyers to other business purposes or projects, refused to hand over possession and did were unwilling to pay delay penalties to buyers in accordance with terms of the sale and purchase agreements. In several instances particularly in Delhi NCR area, there were gross violations by developers and too many unfinished construction dotting the landscape. The plight of many buyers was that, they had to service EMI for housing loans taken, while at the same time having to pay rent for leased premises as the possession of their flats got inordinately delayed by developers. The litigation recourse through courts [or even settlement through consumer courts though relatively faster], proved to be quite long drawn and costly and generally not effective enough to protect buyers interests. 

A change for the better…

The current year 2016 has brought some good tidings to home buyers. Proactive stance by the government and vigilant courts resulted in some crucial steps that are expected to bring down home prices, make housing market more transparent and cut down delays in delivery. In a largely investor-driven market, now end-user is likely be the king in days ahead. These steps are summarized below:

1. Demonetisation 

As mentioned earlier,  there hasn't been much demand with a lot of unsold and unfinished inventory since 2013, and demonetisation will pull it even lower as industry experts believe housing market would continue to experience a lull. 

The primary market is likely to remain unaffected by the demonetisation shock as it is largely financed through banking channels. But unorganised builders and the secondary market, both of which have been awash with black money, will take an immediate hit and that could spell a favorable impact for buyers in the longer run. A price correction in the secondary market in the coming quarters due to liquidity crunch or funding through banking channels might lead to correction in the primary market too. 

As it is, affordability in residential sector is at a five-year high as income growth over the past five years (10 to 12 per cent per annum) has outpaced property price inflation (-10 to 10 per cent), setting the path for a demand-led recovery.

2. The Benami Transactions (Prohibition) Amendment Act, 2016 

Tough times seem to lie ahead for those who have acquired assets beyond known sources of income. This new law, designed to curb black money, has a provision for up-to seven years imprisonment and fine, as against the previous amended law that had only three-year imprisonment or fine or both. 

The law allows the government to confiscate properties or assets held in fictitious or another person's name to evade tax and hide unaccounted wealth. The Act will cover movable, immovable, tangible and intangible properties and also includes any right or interest in such property. 

Moreover, it gives the authorities power to conduct inquiries into any benami transaction. The expected crackdown on benami property is expected to bring prices down by discouraging such modes of illegal investment. 

3. The Real Estate (Regulation and Development) Act, 2016 

The new law puts in place institutional infrastructure to protect interests of home buyers. A Real Estate Regulatory Authority will enable buyers who have invested in real estate projects, including existing ones, to secure interest at 10.9 per cent per annum for delayed possession. 

The law that became effective from May 2016 is expected to bring transparency in real estate transactions, reduce litigation and speed up delivery. It may take some time to impact the market as all states, barring Gujarat and Uttar Pradesh, have missed the October 31 deadline to notify the rules and operationalize the Act, which is slated to be the biggest reform in the real estate sector 

4. Warning from courts 

In 2016, courts took cognizance of the unethical acts of several property developers.

When the ruling went against the developer and in favor the buyers, the developer pleaded financial inability to honor the buyers dues. The court direction to developer Supertech sums it all up: " You sink or die, we are not concerned. You will have to pay back money to home buyers. We are least bothered about the financial status."  The court further directed Supertech to submit a detailed chart of payment to 14 buyers, thus sending out a neon-sign warning to other rogue developers too.

In July, the Supreme Court had asked Unitech to deposit Rs 5 crore in a month for delaying the completion of a high-end residential project, Burgundy, on the Noida-Greater Noida Expressway in Delhi NCR.  In September, the Delhi High Court asked the same developer to set up escrow accounts for its much-delayed housing projects. In a recent case , the Supreme Court asked Unitech to deposit Rs 15 crore, the principal amount paid by 38 home buyers in two delayed projects in Gurgaon and Noida. 

In October, the Supreme Court ordered Parsvnath Developers to refund Rs 22 crore to 70 home buyers for delaying possession.

This flurry of crackdowns in 2016, will hopefully make other developers fall in line in 2017. 

Conclusion

All the above measures are expected to substantially address the concerns of genuine home buyers, who can expect much better deals and reduction in EMIs as well due to reduction of interest rates by banks in the forseeable future.

Further, post demonetization the Government is likely to turn the heat on benami real estate transactions which has been a favorite investment avenue for black money hoarders.

Additionally, in absence of a cash market, depressed sales and mounting interest costs on borrowings many developers will be forced to offload their inventory and thus substantially reduce prices of building inventory in coming months.

In light of the above, home buyers today are rightfully taking a wait-and-watch approach to investments, hoping for acche-din to materialize in the months ahead.

Source: Excerpts also included from Economic Times "Year-end special: Four cheers for home buyers in 2016" By Sunil Dhawan - 7 Dec.2016