Real Estate: Is increase in circle rates bad news for home buyers?
A hike in circle rates typically leads to rise in property prices, but that’s unlikely to happen at present
If you are planning to buy a house in Gurgaon, you may first need to assess a critical criteria. Recently, the Haryana government raised circle rates in Gurgaon. Typically, when circle rates are raised, the market rates in the area also rise proportionately. But will that happen even now when the real estate market is floundering?
Circle rates are reviewed by each state government from time to time. Effective 9 April 2018, circle rates in Gurgaon were increased by up to 20%, barely two months after the rates were raised on 12 February by 10-15%. The Maharashtra government also reviewed the circle rate (known as ready reckoner rate in the state) in April for FY2018-19; it was kept unchanged though.
We tell you how a rise in circle rates can affect your buying decision, and what are the implications of such a hike.
What is circle rate?
Circle rate is the minimum price fixed by the state government at which a property needs to be registered when bought or transferred (see graphic). A property has to be registered either on the actual transaction value or the minimum rate, i.e. circle rate, set by the government, whichever is higher, after paying stamp duty and registration charges.
In rare cases, where the actual price is less than the circle rate, the property is registered at circle rate.
How will it affect property prices?
In case of bullish markets, where demand is higher than supply, typically property prices rise after an increase in circle rate, as sellers want to pass on the extra burden on buyers. However, in the current bearish real estate market, where supply is higher than demand and buyers are not willing to shell out even the current price, it would be difficult to raise prices on the pretext of higher circle rate.
“It is evident that effective property prices have come down in Gurgaon over the period. Government must be having other objectives, but the increase is certainly not as per market dynamics,” said Samantak Das, chief economist & national director – research, Knight Frank India, a real estate consultant.
“Property prices are determined based on demand and supply,which is not reflected in the revision of circle rates,” said Samir Jasuja, founder and chief executive officer, PropEquity, a Gurgaon-based real estate data, research and analytics firm.
The impact on buyers
Over the past few decades, while property prices kept rising, circle rates were revised only occasionally, creating a gap between the actual market price and the declared value. This spawned a cycle of transactions in unaccounted money. People would register a property at the circle rate or declared value, and use the gap with actual market price to offload unaccounted money. The gap had its benefits too as the buyer had to pay less stamp duty, and the seller was able to hide her actual capital gains, and save tax.
Increasing the circle rate can reduce this gap.
For salaried individuals, buying a home will become easier as the share of unaccounted money reduces. Often, salaried individuals depend on a home loan to buy a house, and are unable to make huge cash payments. For instance, if an person can afford a home loan of Rs50 lakh for a house priced at Rs60 lakh, but the declared value is only Rs30 lakh, she will get a loan of only, say, Rs25 lakh. She may not be able to arrange the balance Rs35 lakh in cash. If she were to get a loan of Rs50 lakh, the cash amount she would have had to arrange would be only Rs10 lakh.
Mint Money take
Increase in circle rate at this juncture may not impact property prices, as prices are governed by market forces—demand and supply—and the demand is low at present.
Developers might use the opportunity to say that prices will increase but that’s unlikely to happen. “Property prices are not expected to go up in next 1-2 years,” said Jasuja. Das agreed, “Any significant price rise can be ruled out for at least a year.”
If you are planning to buy a house, don’t let an increase in circle rate scare you away. Unless developers get rid of their inventory, any price rise is unlikely in the near future.