High Ceiling

"The increase in the service tax base rate is anticipated to trickle through, albeit marginally," says T. Chakrabarti, head, India Property Research. Agrees Akshaya Kumar, CEO, Colliers International India Property Services: "It will lead to a marginal increase. Prices of residential units could go up between 0.25-0.50 per cent from prevailing levels." Joygopal Sanyal, head, Land Agency (western region), Trammell Crow Meghraj Property Consultants, says "the service tax impact on construction will affect the real estate prices marginally, between 0.5-0.75 per cent. Market forces indicate that prices will continue to increase in coming years."

Here’s how it’ll work. The service tax will not be calculated on the total cost of the property—which includes the cost of land, cost of construction, developer’s margin and other charges—but only on the construction cost component. "This component varies across cities and is directly proportional to the grade of specifications," says Anuj Puri, MD, Trammell Crow. Analysts believe the cost of construction varies between 25-40 per cent of the prevailing market price. So in case you are planning to buy a property worth Rs 45 lakh, the cost of construction could vary between Rs 11.25-18 lakh and the service tax liability will be calculated after giving credit for all duties paid by a developer on input material. For instance, the developer can claim credit for excise duty paid on raw materials like steel, cement and paint. So, on a Rs 45 lakh property, the EMI on a 20-year loan at 8.5 per cent interest would go up by just Rs 165-268.

"The service tax hike, the increase in interest rate on home loans, it won’t affect the current boom in the residential property market," avers Jayant Varma, executive director (North), Knight Frank (India). There are many reasons for this optimism. The economy is doing well and salaries are going up. This has resulted in higher disposable incomes, increasing affordability. Further, the gap between demand and supply is huge. "As of now, both these factors seem to be marginally changing, on the basis of which anticipating a significant reversal may not be appropriate. However, these are critical factors and if the interest rates keep rising hereafter, it may lead to liquidity issues in the market, which could affect present trends," cautions Chakrabarti. Agrees Manisha Grover, associate director, Research and Strategic Consulting, Jones Lang LaSalle India: "The expansion in demand for residential property is sensitive to pricing. Developers must play a constructive role in creating a sustainable market by ensuring that pricing is aligned with affordability."

Another change proposed in Budget 2006 relates to putting copies of land records online. This will simplify the home buying process. A most common advice given by realty consultants to prospective home buyers is to ensure that the land on which they intend to buy the property be free from encumbrances. But until now, checking land records was a cumbersome process. Now, there will be more transparency. "It’ll have very good long-term meaning for the real estate sector, allowing for greater transparency in land data and records, benefiting both buyers and sellers," feels Chakrabarti. Adds Puri, "The title search, sale price, registration charges and status of taxes paid by the owner can now be checked." It seems the housing party won’t end so soon.