The cabinet note for linking real estate to your Aadhaar number is ready and may see the light of the day soon, as per the news reports. We should kick any thought of a real estate ‘revival’ a few years down the road if that happens, which is a good thing for an average tax-paying salaried Indian. Talking about the word ‘revival’ as it appears across the media and in PR outreaches, you look at the world from the point of view of the developer, the broking firms and the banks, and not from your own point of view.
While owning a home in a city remains just out of reach for millions of Indians, our country has this strange history of having millions of unoccupied homes waiting for buyers. Since the investment demand has dried up, the real demand for housing sits at a price point that is below what the unsold are going for. In the war against the use of the real estate, the linking of a biometric identifier to a piece of real estate could prove to be another step as the sump for ‘black’ money. It could prove to be a great thing for the real buyers and investors of real estate in India, as it will reduce prices to more realistic levels that are supported by current incomes which are used to pay the EMIs as tax-paid money attempts to buy real estate.
The story of India that is going kicking and screaming towards less corruption and black money can be derived from tracing the price history of residential real estate in India. The price revival in real estate that began in the early 2000s was based on the great yields available at that time of roughly 4-6%. But that uptick became a frenzy because cheap money in the economy found its way to real estate. Cheap bank funds went to fund big projects, while some of the bank funding was simply siphoned off by promoters into shell companies. They invested in real estate under false names or in the names of relatives, employees, drivers, cooks, and others.
As the siphoned off money found homes in real estate, property experts would joke that Delhi real estate prices jumped by 15-30% after the Common Wealth Games. Real estate began its slow downward spiral from 2010-11, after the hyper jumps between 2003 and 2010 when prices went up almost every week. What sticky prices could not achieve, inflation did, making a 25-30% dent over the past few years in absolute terms. It began as a slowdown in an over-priced and hyped asset, but soon became a deeper problem as the Modi government went after corruption almost from the time it took office in 2014.
Giving teeth to the Benami Transactions Act, demonetization and linking tax returns to Aadhaar, all have worked to take the air out of the over-priced real estate by making it difficult to hide black money in it. Buying real estate has remained a murky affair for honest taxpayers, with the need to turn white into black and then get penalized by the higher stamp duties than what others with a 40-60% black component pay. One can expect the difference between an EMI and rent to begin narrowing, as it becomes tougher and tougher to hide black money in real estate.
In a market that will not see a price revival for some more years, EMIs are a multiple of the rent, making renting a better option than buying. Linking Aadhaar with property ownership will not allow property prices to rise in the near future, since much of the price rise has been due to the rush of cash into this asset class. As per the rough rule of thumb, one should be getting at least a 4-5% yield on the property for it to be a good investment, which means divide the annual rent with the value of the property; if that number is less than 4%, walk away.
Due to the war on black money, the capital appreciation that will make this low yield worth is not going to happen. The realization that real estate is not a sure bet that can be banked on for a multiplier return is beginning to sink in. Every asset in your portfolio will work according to basic investing logic, as the economy gets more formalized and the Aadhaar link makes it more difficult and costly to hide black money.