Photo: iStock
Photo: iStock

Linking Aadhaar to real estate will help real buyers

This link will be a great thing for the real buyers as it will reduce prices to more realistic levels

News reports say that the cabinet note for linking real estate to your Aadhaar number is ready and may see the light of the day soon. If that happens, then we should kick any thought of a real estate ‘revival’ a few years down the road. And that is a good thing for an average tax-paying salaried Indian. Because if you decode the word ‘revival’ as it appears across the media and in PR outreaches, you are looking 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—a real estate aspirant looking for a home to live in or an investment to make. India has this strange story of having millions of unoccupied homes waiting for buyers while owning a home in a city remains just out of reach for millions of Indians as well. The real demand for housing sits at a price point that is below what the unsolds are going for and since the investment demand has dried up, the unsolds sit past their sell-by date. The linking of a biometric identifier to a piece of real estate has the potential to be another step in the war against the use of real estate as the sump for non-tax paid money—also called ‘black’ money. This link, if it happens, will 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.

Just tracing the price history of residential real estate in India tells you the story of a country that is going kicking and screaming towards less corruption and black money. 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 and, as we see today, some of the bank funding was simply siphoned off by promoters into shell companies and invested in real estate under false names or in the names of relatives, employees, drivers, cooks and others. Property experts would joke that Delhi real estate prices jumped by 15-30% after the Common Wealth Games as the siphoned off money found homes in real estate. After the hyper jumps between 2003 and 2010 when prices went up almost every week, real estate began its slow downward spiral from 2010-11. What sticky prices could not achieve, inflation did, making a 25-30% dent over the past few years in absolute terms. It began as 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.

For honest tax payers, buying real estate has remained a murky affair 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. As it becomes tougher and tougher to hide black money in real estate, expect the difference between an EMI and rent to begin narrowing. EMIs today are a multiple of the rent, making renting a better option than buying in a market that will not see a price revival for some more years. Real buyers and investors into real estate should know that 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. Your rough rule of thumb remains this: you should be getting at least a 4-5% yield on the property for it to be a good investment. That means divide the annual rent with the value of the property; if that number is less than 4%, walk away. The capital appreciation that will make this low yield worth it is not going to happen due to the war on black money.

The realization that real estate is not a sure bet that can be banked on for a multiplier return is beginning to sink in. Understand that as the economy gets more formalized and the Aadhaar link makes it more difficult and costly to hide black money, every asset in your portfolio will work according to basic investing logic—not some fancy stories of discovering olive groves in Okhla with Italian marbles and a jacuzzi.

Monika Halan is Consulting Editor at Mint and writes on household finance, policy and regulation.

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