Should You Invest In Real Estate After Full Budget 2019?
Jun 25, 2019

Author: PersonalFN Content & Research Team

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(Image source: Image by Mediamodifier from Pixabay)

On July 5 2019, Ms. Nirmala Sitharaman will present her first Union Budget.

While the list of expectations runs long, there could be some encouraging announcements for individual taxpayers.

In particular, the government might consider generous tax exemptions for homebuyers.

There's been a demand to increase the exemption limit on the repayment of housing loan up to Rs 5 lakh for five years. Experts also expect an exemption on the interest repayment of housing loan of up to Rs 4 lakh.

The government has already lowered the GST rates on affordable housing from 8 per cent to 1 per cent.

Interim Budget 2019 had made three prominent announcements for the sector

  • Exempted notional income on the second self-occupied house

  • Exemption from the capital gains tax even when gains are invested in two houses

  • Increased TDS deduction limit on the rent income from Rs 1.8 lakh to Rs 2.4 lakh per year.

You might be wondering why the real estate sector is likely to get so much attention in the first budget of Modi 2.0?

The simple reason is that the sector requires immediate attention and a serious boost, else there might be some systemic issues.

The Economic Survey conducted before the Interim Budget 2019-which was the last budget before Lok Sabha Elections-had revealed startling facts about the housing sector.

While there is a housing shortage, at the same time, metro cities such as Mumbai, Delhi, and Bengaluru had a huge inventory. According to The Hindu Business Line dated January 29, 2019, Mumbai have approximately 4.8 lakh of unsold houses while Delhi and Bengaluru have about 3 lakh properties each.

The on-going Non-Banking Financial Company (NBFC) crisis has added to the worries of real estate sector.

While speaking to the media a few days ago, the Managing Director of an NBFC hinted at the severity of problem, "Funding to the (real estate) sector has reduced by 80% since September 2018, with average ticket size dropping by at least 60% in the last six month."

DHFL fiasco has served as an eye-opener for the sector.

On this backdrop, Financial Stability and Development Council (FSDC) met recently to review the macroeconomic situation and financial stability issues including those experienced in the banking and NBFC sector. The Council also held consultations of the financial sector regulators in this regard.

Should you invest in residential property if the Union Budget 2019 offers additional exemptions to home buyers?

While buying a residential property as an 'investment' carries advantages such as the potential of wealth creation (possibly even countering inflation), diversification, and rental yields, one shouldn't ignore the basic traits of real estate investing:

  1. Investments in real estate are big-ticket, more often than not.

  2. Investment in real estate isn't risk-free.

  3. Real estate assets can be illiquid-unless you are able to sell-off assets, it won't fetch you much returns.

  4. Unless you bought the property much below the current market value, rent yields hardly match the interest earned on the savings bank account.

For example, can a house worth Rs 45 lakh fetch you Rs 30,000 rent per month? Given the property rates nowadays, it looks extremely difficult. Properties located at the prime spots usually fetch such rental yields. And it's difficult to buy a house for Rs 45 lakh at any prime location in the metro or even in tier-1 cities.

But, the aforesaid factors don't matter if you are looking out for a house to live in – a primary home. In such a case, you should look at your personal affordability, convenience, debt servicing ability (in case you take a housing loan), amongst many other facets.

If Union Budget 2019, indeed, has any big bang announcements for the housing sector, you shouldn't get carried away.

And remember, tax exemption can't be the basis for buying a house.

PS: If you think investing in real estate is a good way to earn additional source of income for your post retired life. Think again!

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