The long slump in luxury home sales, already weighed down by a crackdown on black money, may extend further into this year and the next, as higher tax on top income earners is likely to discourage buyers, say property developers.
Developers fear the decision to increase a surcharge on individuals with taxable income of more than ₹2 crore will reduce demand further and increase the already high inventory pile-up.
“Continuously taxing the rich is not positive for us. The overall impact is not going to be good for high-end homes. How negative it may get, it depends on the price points of where you are," said Boman R. Irani, chairman and managing director of Rustomjee Group, a Mumbai-based real estate firm building several luxury residential projects in the city with ticket sizes beyond ₹10 crore.
Demand for top-end homes was hit the hardest by the ban on high-value currency notes in 2016, as property investments, much of it in cash, were long used to park black money. The cocktail of tax increases, glut in supply and the crackdown on illicit money means that developers’ long wait for a rebound in sales will continue.
In the quarter ended 30 June, unsold inventories of luxury homes priced between ₹2 crore and ₹5 crore rose by 4% to around 32,840 apartments across the top seven cities including Mumbai, Bengaluru and National Capital region.
Inventory of ultra-luxury homes costing more than ₹5 crore also increased by 4% during the period at 8,175 units, according to data by property brokerage firm ANAROCK Property Consultants Pvt. Ltd.
“Those who are looking to buy ultra-luxury homes beyond ₹40-50 crore, an increase in tax rate of 3-7% may not matter to them. But what matters most are those looking to buy premium homes costing beyond ₹2 crore to ₹5 crore as it could impact sentiments in the short term," said Anuj Puri, chairman of ANAROCK.
Finance minister Nirmala Sitharaman, lin her maiden budget on Friday, proposed to increase income tax surcharge by 3% on individuals earning between ₹2 crore and ₹5 crore and by 7% on those earning more than ₹5 crore, effectively raising the tax rate on the two highest slabs of income earners at 39% and 42.7%, respectively.
While the government has continued to focus on boosting demand for affordable housing, it has not provided much relief to the luxury housing market, which has seen rising inventory in major markets including Delhi and Mumbai.
Developers are concerned that increasing the tax rate may lead to buyers holding back purchases of luxury homes in the short term. With many homebuyers increasingly opting for mid-income homes, priced below ₹1 crore, large luxury residential projects have suffered with many getting stalled midway or completed after a prolonged delay. “The impact is definitely negative, even if it may not lead to significant drop. Three-to-four bedroom apartments costing within the price bracket of around ₹6-7 crore to ₹12 crore may get affected to some extent," Venkatesh Gopalakrishnan, chief executive officer of real estate developer Shapoorji Pallonji.
Embassy Group’s senior vice-president (residential business), Reeza Sebastian agreed that the additional surcharge may dampen sentiments of luxury homebuyers at a time when the residential market was seeing signs of improvement.
“Luxury home sales could get affected in the short to medium time frame. Additional surcharge will force home buyers to keep a longer time frame in perspective before buying property," said Sebastian.