In Part 1 of this article I deliberated on the overall state of our housing industry and the fact that we are not extracting the full potential of this sector. Our housing industry can make a much bigger contribution to our national economy but more importantly, the right policies would mean that many more people can have their cherished dream of owning a home come true.
I mentioned in the last article that there is an old proverb which says “you can’t have your cake and eat it too”. This is applicable to our housing sector policy. You can earn revenue by increasing the taxes on the buyer or you can forego some of the taxes to make housing more affordable for the buyer. You have to choose one or the other. You cannot have it both ways. Very often we see on television some bespectacled pseudo intellectuals giving their expert views on the housing industry and their favourite rant is berating the developers for not doing enough for the middle income segment of the society. These individuals have an expert opinion on every subject except that they themselves have very little to show in support of their own accomplishments. The fact is that the government policies determine which socio economic segment the private sector caters to. The developer is a business enterprise. The business enterprise will go where there is an opportunity. Taxes imposed on the housing industry are eventually borne by the buyer. The more tax the government imposes on this industry the less the number of people will be able to afford owning a home. And these taxes have the maximum effect on those with fixed incomes. The affluent class can afford high priced residences. In fact, the higher the price the more exclusive their address becomes and that exclusivity is one of the desired features for the wealthy segment of any society. To make the housing industry vibrant and thriving, it is imperative that we start focusing on the middle income segment of our society and the government policies must make home ownership affordable for this segment. The following are some of the very obvious points that should be addressed.
Our registration costs are extremely high. After adding up all the sub heads the amount comes to about 14% of the value of the apartment. If the government wishes to make home ownership affordable then this registration cost needs to be rationalized. ( I am glad to see that the registration cost has been reduced in this year’s budget).
The housing industry needs financing at lower interest rates. Lower working capital cost for housing projects being developed for the middle income group will encourage the developers to take up more projects for this market segment and lower interest rate on the buyer’s home loan will make the home more affordable. Here it is pertinent to note that even prior to the Covid-19 crisis the Indian government has introduced a very ingenious policy to support the development of “Affordable Housing”. For the middle income segment of the market, the government is giving a 6.5% subsidy on the entire interest of a 20 year loan and pays it up front to the loan account of the buyer. This reduces the total loan amount and hence the EMI for the buyer goes down.
In many countries there is no capital gain tax on the sale of the principal residence. Capital gains tax is only applied to those who buy and sell property as a business. Home ownership is encouraged by waiving the capital gains tax on the sale of the principal residence. If we are serious about supporting home ownership then why not waive capital gains tax for the principal residence? It is to be noted that this waiver is only for the principal residence and not any investment property which yields financial gains to the investor.
In all the developing countries the renters are by far the biggest segment of the society. It is the affluent countries which are able to provide home ownership to the majority of their population. Even so in the USA and UK the percentage of the population owning homes is 63 percent and 65 percent respectively. In Bangladesh the tax law relating to investment in housing for rental purpose is very regressive. There are many discouraging features and here is just one example-
Since there is a big disparity between the rent being so low (<3%) and the bank interest being so high (9%), the investor incurs a loss on his P+L account every year because of the high interest charges. For reasons unknown, the tax office does not allow these losses to be carried forward to the following year. I fail to understand why. If losses can be carried forward for other business enterprises then why not for this very important industry? Since the investor incurs losses on his P+L account, his only attraction is the gain that he can make on account of the appreciation in the value of the property when he sells the property. Because the losses from the P+L account cannot be carried forward to the following years, they cannot be offset against any gain that the investor makes due to the appreciation of the value of the property. The huge gains tax makes the investment unattractive which in turn translates to a lesser number of new housing projects being developed for the renters.
The Secondary market is a very important segment of the housing industry. Thriving activity in the secondary market helps expand the development of the housing industry. Many buyers cannot afford a new apartment. They are looking for cheaper options. The used apartments are generally sold at a much lower price. The secondary market is where the low budget buyer can find what he is looking for. Here too our system is flawed. It does not differentiate in the value of a new apartment from an old apartment although the old apartment is sold at a much lower price. This means a disproportionately high registration cost for the buyer in the secondary market. Until the secondary market is thriving the primary market will not be vibrant because the secondary market also gives an owner the flexibility to dispose of his home easily so that he can buy an apartment in a new development project.
In our country investment in the real estate sector has traditionally been reserved for the wealthy segment of the society. The retail investor should also have an opportunity to invest in this sector. All over the world, brick and mortar has proven to be the most dependable investment over the long term. The small investor cannot afford to buy an apartment in the metropolitan cities because it requires a very substantial financial involvement. The vehicle through which the retail investor can avail the opportunity of making investment in real estate is through Real Estate Investment Trusts (REITS). REITS are companies that own and operate income generating properties and allow the small investor to own prime real estate through owning shares in these companies and thereby earn a share of the rental income from the properties owned by the REIT as well as earn a capital gain when any property is sold by the REIT. REITS are normally publicly traded and therefore the investor can at any time sell his shares in the stock exchange much like it is done with the shares of any publicly listed company. REITS were originally devised in the USA in 1960. The first REIT was listed in the New York Stock Exchange in 1965. Now there are more than 30 countries which have REITs operating. The Securities and Exchange Board of India first approved the REITs regulation in 2007 but subsequently a revised regulation for REITS was approved in 2014. It is time that we in Bangladesh also pass a law allowing the formation of REITs which will give the retail investor an opportunity to invest in the real estate industry thereby opening up a new source of funding for the development of new housing projects for the renters.
This article would be incomplete without touching on the contentious subject of allowing undeclared income to be invested in the country’s economy with minimal tax implications. Today I am not going to go into an elaborate biopsy of the pros and cons of this issue. Maybe in the future I shall dwell on this matter separately. For now, I would just like to say that if the government is allowing this facility then it should be implemented effectively. The reason it is failing is because while the NBR has allowed investment of undeclared wealth, the Anti Corruption Commission (ACC) is not restrained from investigating any individual who does avail this facility. Until and unless there is a full immunity against any form of prosecution from ACC or any other government body, this scheme will get very limited results.
I strongly feel that our industry has a lot of potential. Its present contribution of a mere 8 percent to the GDP of the country reflects that this industry is mal functioning. There is a chronic shortage of housing in the metropolitan cites of Bangladesh and nowhere more so than in Dhaka. We have a progressive democratically elected government which is empowered to bring change. Perhaps this paper will reach the powers that be.