Budget proposals to curb investor demand in homes

Cap for deduction on loss under income from property and reduced holding period for LTCG will impact

Two Budget proposals could curb the demand for residential properties, whose market has already slipped after demonetisation.

According to the Budget, a person owning a second home can claim a deduction of Rs 2 lakh a year on account of losses on it. Currently there is no limit on the deduction that can be claimed.

"Unless property prices start appreciating, this move will reduce the incentive a salaried person earlier had to invest in a second home and optimise tax. We believe this is likely to impact demand, especially in the top seven metros (more service-sector jobs), in an already weak market," said Samar Sarda, Nischint Chawathe and Abhijeet Sakhare of Kotak Institutional Equities in a report of February 2.

Further, there could be pre-payments of loans on such properties, and that might put pressure on housing finance companies, they said.

Abhishek Anand, an analyst with JM Financial Institutional Securities, said the move increased the cost of funding by 30%, with returns going down by 3-5% in the first year.

"The government is telling people not to leverage and invest in properties. Even if you leverage, don't set off against other income," said Amit Bhagat, managing director and CEO, ASK Property Investment Advisors, a fund manager.

In addition to this, the clause on reducing the period of holding an immovable property for getting long-term capital gains from three to two years will reduce the exit cost for investors, analysts say.

"We believe these provisions will significantly impact investor demand (already declining) and increase supply in the secondary market as house economics worsen materially (4% capital appreciation required to break even), leading to headwind on property pricing," Anand of JM Financial said.

According to analysts, investor demand in both the National Capital Region and the Mumbai Metropolitan Region has come down since the global financial crisis as prices stabilised in these markets. 

However, the Budget is expected to give a boost to affordable housing because of the segment getting infrastructure status. This would mean more funds at a lower cost for developers and lower prices for buyers.

This, along with the decline in interest rates, is expected to give a boost to home sales in the affordable segment.