After hunting around for nearly two years in Mumbai, Surajit Chowdhury, a 30-year-old middle level manager in a communication firm, has finalised the purchase of a two-bedroom house in the city’s Goregaon area for Rs90 lakh. His achievement: finding a deal in which he could simply write out a cheque.
Affording an apartment was never really his problem but coughing up the “black” component of the transaction was. The tax-evading cash part of the deal has been a tough call for many a flat buyer in the financial capital.
However, with interest rates surging and demand slowing for home purchases, Mumbai’s real estate developers have begun shedding their penchant for black-loaded deals. They are now ready for 100% cheque deals, say industry executives.
“With the increase in interest rates, demand has hit a low, and in this situation it is difficult to get loans. Developers are adjusting to the new reality,” said Anand Gupta, general secretary, Builders’ Association of India.
“It is the system that is working in a way that if a customer now wants he can dictate the terms to pay the full payment in white,” said Gupta.
The black component is an integral part of the Mumbai real estate business in which properties more often than not are registered below their real deal values to save on property tax (and also income tax on the developer's side). “In some transactions the developers asked for as much as 30% of the total price in black. It's impossible for a salaried class person to accumulate such an amount in cash,” said Chowdhury, relieved that he could finally clinch his deal.
The prime factor driving the change is the loan eligibility linked to incomes. Because people with the same salary levels get to borrow less in a tighter money market, they need to have as much of the “white” component in the property deal to stretch their loan eligibility to the maximum.
In the past 18 months, a prospective home loan buyer's eligibility has come down by about 20% as the RBI increased its signal policy rates 12 times in 18 months. So, a person who earns Rs 1 lakh a month who could get a loan of around Rs 50 lakh for a 20-year tenure in March 2010 can get only Rs 40 lakh now.
The lower loan eligibility of a customer combined with higher real estate prices has put off customers so much so that demand has declined by about 25% over the past year, say industry officials. For developers, raising the cheque component is a natural way to increase demand.
Typically, the eligible loan is for 80% of a property’s registered value. “Many developers, especially big ones, are accepting the whole amount in accountable money. But there are also those who demand money in unaccounted cash,” said Pankaj Kapoor, MD, Liases Foras, a real estate consultancy.