Housing, the in-house tax-haven and its headwinds | Number Theory

In India, every housing transaction requires paying a stamp/registration tax to the respective state government.

Anecdotally, India’s housing market has always been believed to have a shadow component. To be sure, there are very few large economies in the world, which do not have a tax-evasion problem especially one that involves investing undeclared incomes in household assets. The opportunity cost of stopping such activities through drastic methods can often be prohibitively high for an economy. But at a certain level, shadow economy in sectors such as housing can become a strain on household viability. Recent

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Housing, the in-house tax-haven and its headwinds

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  China's house prices have fallen off a cliff, after the state's push

  The data is drastic. Real residential real estate prices in China are now lower than what they were two decades ago. This is not exactly the market at play. The Chinese state, led by none other than President Xi Jinping, has been going after the housing market alleging that speculative investment in houses creates a bubble. Since 2016, the Chinese state, both in rhetoric and policy has gone after the housing market, and unlike many doomsday predictions, seems to have killed residential real estate capital gains without killing its economy, at least for now.
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  Unlike China, house prices continue to rise in India...

  Data from RBI’s house price index is unambiguous. While the pace might have slowed down lately, house prices in India are more than three times what they were in 2010-11. Anecdotally, this makes perfect sense in India. In fact, the post-pandemic housing market rally seems under-represented in the data.
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  ...And housing loans have seen a rise in their relative leverage

  Outstanding housing loans of scheduled commercial banks, as a share of both GDP and Private Final Consumption Expenditure (PFCE) have seen an increase since 2011-12, the period from which RBI’s house price index shows a rising trend. The implication is clear: there has been an increase in relative economic leverage as far as households buying homes is concerned, perhaps a result of houses becoming more expensive vis-à-vis incomes. The latter is what GDP would capture.
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  But, house-sale taxes adjusted for housing loans are down

  This is the counterintuitive statistical evidence on the sector. In India, every housing transaction requires paying a stamp/registration tax to the respective state government. The ratio of these taxes collected at the all-India level with both stock (total outstanding) and flow (annual increase) of housing loans shows a fall in the period from 2007-08 onwards, the earliest from which we have data on housing loans.
• So, what explains this dichotomy?

  This is an important question to ask, given what the data shows. Answering this in a water-tight manner will require more data than is readily available: granular information on changes in tax rates across states, geographical distribution of housing loans to match the tax data, etc. Anecdotally, one can say that states have not reduced tax rates drastically. In fact, many have even increased it. Then, there is also the question of circle rates which set the minimum value of property. How effectively they have kept pace with market prices is a difficult question to answer. However, circle rates too have not fallen over time. Another, more provocative question awaits. Logically speaking, the tax-housing loan ratio could also fall if house sales are not financed by loans, either entirely or partially. Either of them will require a large increase in net worth of house buyers i.e. households. Most economic data do not suggest a radical departure in terms of household income growth during this period. Another possibility could be that a shift towards greater share of transaction values being shared in undisclosed incomes which would require neither housing loans nor tax payments. A growing demand from the shadow income economy could very well be keeping the housing market from a price correction. It might be serving tax evasion purposes effectively, but both the government and households might be paying the price in terms of lower taxes and rising unaffordability of houses. Given the data presented above, this perhaps deserves more attention than being dismissed as just a conspiracy theory.