The clamour for according ‘infrastructure status’ to housing in the Budget arises out of an immediate circumstance: the tax holiday for housing projects under Section 80IB of the Income Tax Act comes to an end this fiscal.
It is not, however, clear how these tax breaks were allowed. Housing does not qualify as infrastructure for at least two reasons: First, it is not a ‘public good’, one that is simultaneously used by a number of people; and second, its profits are made before a project is commissioned. A tax holiday is meant for projects where the returns start flowing in much after a project is ready.
The other benefit an infrastructure project could enjoy is finance at easy rates. The moot point is whether housing is deserving of tax breaks and cheap finance.
The sector works on high margins and can do without policy sops. Prices have outstripped costs, even going by official data, which do not capture the true extent of the price rise. According to the composite Consumer Price Index for December 2012, housing prices are up 23 per cent in less than two years. The index number for December is around 123, whereas the brochure explaining the new index says that “for the period January-June 2011, house rent is taken as 100.” As for inputs, according to the wholesale price index figures for December 2012, cement prices have risen 4.46 per cent y-o-y, against 8.91 per cent in December 2011. Iron prices rose less than 1 per cent y-o-y in December 2012, against 25 per cent in December 2011. Basic metals were up 3.37 per cent in December 2012, against 13.53 per cent last year.
The pricing power is reflected in the difference between the growth of the ‘finance, real estate, insurance and business services’ at constant and current prices. According to the latest advance GDP estimates, the inflation element in this sector is pegged at 8.7 per cent in 2012-13, against 7 per cent in 2011-12, despite the fall in GDP growth to 5 per cent.
This price-spike is aided by home loans. Banks have been lending on the expectation that the housing values will increase, and actually drive up prices. Developers use the funds of buyers rather than bank loans to finance their projects. The consumer pays for both an overvalued house and the capital of the builder! Not surprisingly, gross bank credit to ‘housing’ was up from Rs 234,300 crore in April 2011 to Rs 402,700 crore in March 2012 (increase of Rs 1.7 lakh crore), , whereas the same to ‘commercial real estate’ (CRE) rose from Rs 114,550 crore in April 2011 to Rs 120,519 crore in March 2012, a rise of about Rs 6,000 crore. Stagnant credit to CRE may not indicate a crisis. Lower interest rates can only fuel higher prices, not “affordable housing”. Forget policy sops -- the sector needs a clean-up to reduce prices.