A meaningful revision of property tax incentives happened during FY99-02. In FY02-14, tax incentives were unchanged. The new Government raised the limit of these incentives in theFY15 budget by 30%. We believe it was too little. Since FY02, residential property prices are up 6-7x.
As a part of a realignment process, if the Government doubles tax incentives, we estimate the incremental hit on its income tax collections would be US$1.5bn/year, or 7bps of GDP. But the net impact would be one-third lower, due to higher direct and indirect taxes.
Greater tax incentives (coupled with lower mortgage rates) would improve housing affordability to the best seen in 12 years. The effective cost of borrowing could fall by more than 100bps to c.6.4% for a house costing ~Rs6.5m (US$100,000).
The RBI’s recent 125bps rate cut has already reduced mortgage loan rates to 58-month lows. The recent reduction in risk weights attached to mortgages and a further pass-through of lower rates may drive another 10-15bps correction in mortgages.
We believe that the ensuing release of pent-up demand for housing (the property sectorhas seen a slowdown for the past 18 months) should drive incremental property investments of US$15bn-20bn over the next three years.
