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We all knew the middle class can’t afford homes in India’s metros. It just got official. Abhijit Patnaik reports.Circle rate decoded | Homes out of reach

india Updated: Nov 07, 2011 02:01 IST
Abhijit Patnaik
Abhijit Patnaik
Hindustan Times

The middle-class dream of owning a home, captured in the 1974 Manoj Kumar classic Roti Kapada aur Makaan, has received a final nail in the coffin. Last week’s hike in circle rates in Delhi, which pushed them over the R2 lakh-per-square-metre mark in some areas of the capital city, has given legitimacy to the already mind-boggling property prices.

Although, Delhi chief minister Sheila Dikshit justified the move as it would bring “the official benchmarks more close to market rates and eliminate the role of black money,” the hike is a reflection of a cash-strapped government’s desperation for revenue. According to the Delhi government, it loses Rs 500 crore every year because nearly half of the property business in the city is carried out via black money transactions. Tamil Nadu is also planning a similar revision this month.

As states across the country seek to align their benchmark rates — the minimum rate below which a property can’t be bought or sold — with the market rate, citing their intent to curb black money, property prices are touching the sky. In the process, middle income groups are pushed to areas which bridge the periphery and the main city. And the periphery is moving further away for those looking to buy a home. This underscores the urban-rural divide, and creates class divisions within urban agglomerates.

"India’s property market is mainly capital driven. Big investors with money drive prices up," said Pankaj Kapoor, MD, Liases Foras, a Mumbai-based real estate research firm. In an unregulated and fragmented market such as India's, brokers and the developer fraternity are setting market rates in India, instead of trained property valuation experts, he said.

Property valuations are driven more by speculation than real factors such as the age of the property, quality of materials used, location, facilities etc.

“By raising prescribed rates, the government is giving a legitimate excuse for sellers to overcharge,” said Sachin Sandhir, managing director, RICS South Asia, a real estate consultancy.

Vicious Cycle
With government rates playing catch-up with market rates, many middle-income buyers are getting squeezed out. And the existence of black money has pushed prices even further.

“If I am selling property A and buying B, then the seller of B will demand 30-40% payment in black, so even if buyers want to purchase in white, they can’t,” said Sunil Seth, a chartered accountant. It is a system where only the rich who have black money are able to buy across the country, he added. High stamp duty, registration fee and capital gains tax on property transactions also drive many to underpay in the ‘white’ transactions.

“Salt Lake, which was once known as a residential area (in Kolkata) for mainly government employees and other middle-income groups, is now predominantly populated by the rich,” said Mayank Saksena at real estate services firm Jones Land Lafalle.

Of course, in many areas, the black money problem persists since government rates are woefully below market rates. “I don’t see any need for such rates in areas where high income people stay — the low government rates are in fact subsidizing houses for them by not extracting enough,” said PK Jain, former commissioner, Planning, Delhi Development Authority, making a case for market rates to apply. Even when market rates fall, governments are unwilling to revise their rates downward as it will hurt their revenues.

Beacon of hope
But not all is lost.

In Hyderabad, property prices in many middle class areas remain reasonable.

With good infrastructure, almost any part of the city can be reached in 30 minutes. In many areas, the government has removed height restrictions on new constructions, keeping affordable housing in mind.

“The government sets rates in consultation with stakeholders,” said Shekar Reddy, president of the apex body of developers in Andhra Pradesh.

This is an example of a best practice that needs to be looked at from an all-India perspective, he said.

With inputs from HT correspondents in Hyderabad, Kolkata, Mumbai and Chennai

First Published: Nov 06, 2011 23:06 IST