The chart of the day comes from the excellent Vivek Kaul:
What this shows us is that over the last sixteen years or so, there has been a steady increase in the percentage of home loans that have been given to the non-priority sector – that’s the blue line. These were at about 30% in 2007, and are at about 70% today. Obviously, the red line shows us that priority home loans have taken the journey in the opposite direction, falling from about 70% of all loans disbursed in 2007, to about 30% today.
What is a priority home loan, and what is a non-priority home loan?
Priority home loans are loans amounting up to Rs 35 lakhs in metropolitan centers, and up to Rs 25 lakhs in other parts of the country. There’s fine print, but for our purposes, this is a simple and good enough definition. Non-priority home loans, of course, are loans above these amounts.
Long story short, rich people are taking loans to buy homes, while poor folks, not quite as much. But why should this be so? Part of the reason, Vivek Kaul says, is incentives:
Tax policy in India incentivizes buying homes as an investment. Income earned from the salary or business income of an individual is taxed at the marginal rate of tax. The highest marginal rate of tax, even without taking the different kinds of surcharges for higher income into account, is 30%. At the same time, long-term capital gains made from selling residential real estate is taxed at 20% with indexation benefits being available. Indexation allows the consideration of inflation while calculating the price of buying a house as well as improvements made on it over the years, in order to calculate capital gains. Long-term capital gains on selling a home come into the picture if the period of holding between the buy date and the sell date is more than 24 months. This effectively means that the tax on capital gains (a form of income) made from buying and selling of homes, is significantly less than even 20% (it can be even lower than 10%). Plus, the holding period of two years is way too low
https://www.livemint.com/industry/buying-homes-why-tax-policies-need-a-tweak-11705234900028.html
When you buy a house and sell it, say ten years down the line, the gains you make on selling the house at a higher price are taxed at 20%, not 30%, as your highest income would be. Second, your gains aren’t taxed – your gains net of inflation are taxed. And so buying a house and selling it can be plenty darn profitable – a house isn’t necessarily a place to stay. It is, instead, an investment. Take away this incentive, Vivek Kaul says, and you might see the “demand” for housing come down.
Speaking of incentives, he also has an idea for increasing the supply of homes available in cities for renting:
At the same time, the government needs to encourage those who own homes, to not keep them locked and rent them out. On the tax front, this can be achieved by taxing rental income from homes at a lower tax rate. This will also discourage those landlords who insist that tenants pay them in cash (at least in part).
Of course, this will only be a very small step in making residential real estate in cities across India a little more affordable, given that the sector is too complicated and too convoluted to be set right only through incentives and tax policy.
https://www.livemint.com/industry/buying-homes-why-tax-policies-need-a-tweak-11705234900028.html
Incentives matter, and our current policy mix incentivizes the construction of, and the purchase of, unnecessarily expensive homes, but not for the purpose of staying in them. Vivek Kaul says that taking away the incentive of capital gains tax on housing, and introducing a lower tax rate on rental income could go a long way in terms of maki housing for affordable in India’s cities.
Now, homework:
Is this a good idea or a bad idea? Who will benefit by this, and who will be harmed by this? Who will support this idea, and who will protest such an idea? Which group is likely to be politically more active? What are the risks of implementing Vivek Kaul’s ideas? Try adding at least a couple more questions to this list, and then answering them. Some of these questions (and their answers) are already there in Vivek Kaul’s column, see if you can spot them!
EconForEverybody 