Post the demonetisation, GST and Real Estate Regulatory Authority Act, 2016, (RERA) move by the government, the real estate sector felt most of the heat. The sector felt the immediate shock of a slowdown in growth in terms of both customer acquisition and new project launch and regulatory hurdles which at times conflicted with both state and central government rules. All these created a considerable amount of confusion among both buyers and developers.
The government's disruptive move to withdraw high-value currency notes (Rs. 500/Rs. 2,000/-) aiming to curb corruption and fake currency in circulation has taken a significant toll on the real estate sector. The cash component was the major influence in the sector before the demonetization, so there was a huge contraction of growth in the sector in short term but it had many positive impacts on the sector. And further putting a cap of Rs. 2 Lakh on cash transactions helped in improving the transparency, prevent corruption by removing Benami transactions and weed out several malpractices. The move has actually been a blessing in disguise for the sector and large institutional investors. This can be evident that the impact of sales was largely felt on the higher-end or luxury segments and land deals.
The implementation of nation-wide GST rates and RERA has brought dramatic changes in the functioning of the sector as both changes are significant which took time for both developers and buyers to get accustomed to. The GST rates for real estate sector has been fixed at an effective rate of 12 percent. GST is applicable only on the under construction projects. Since land is a state subject and construction materials falls under the broad spectrum of GST, a chaotic situation on tax compliance prevailed and mostly the smaller developers got affected. They are now spending a considerable amount of time in getting everything in order as per RERA and GST rules.
GST plus 5-7 percent tax on stamp duty (depending upon the states) is taking the total tax figure to 17-19 percent, which is huge for buyers.
Softening of home loan rates after RBI announcing a rate cut of 50 bps in monetary policy since June 2017 has also failed to shore up the demand. All these effects resulted in the decline in growth of home loan to 10.5 percent in the 12 months ended July 2017, against 17.2 percent in the same period a year ago.
Many industry watchers feel that the triple moves by the government in a short span of time will lead to a better marketplace for both investors as well as for home buyers and eventually growth will also pick up. The government's focus on affordable housing and availability of cheap fund will make it easy for this ailing sector to scale back. As far as for demonetization, the effect is believed to have faded out and now the main concern is the compliance with GST and RERA regulations for developers.