Budget 2007 is largely unfavourable for the real estate and construction sectors and it could push up costs for the eventual consumers who are already reeling from rising housing loan rates. Budget 2007 will be remembered by the real estate and construction industry for the wrong reasons. It is a budget that has pushed up cement prices thanks to increased levies; it is a budget that has made renting or leasing of commercial property more expensive; and it is a budget that offers little salve to the thousands of middle class housing loan borrowers who are facing an increase in their liabilities following the rising interest rate environment.

The only positive announcement is that the National Housing Bank will soon introduce a reverse mortgage product designed to help senior citizens without a secure source of income in the twilight of their lives. Institutions such as Dewan Housing Finance already offer reverse mortgage products and the proposal is not novel anyway. Let's examine each of these proposals individually.

Higher levy on cement

The Finance Minister, P. Chidambaram, in an effort to control the inexorable rise in cement prices, came up with the idea of a two-tier excise duty structure designed to reward those cement manufacturers selling at Rs. 190 per 50 kg bag with a reduction in excise duty to Rs. 350 from Rs. 400 per tonne. He then proceeded to increase the excise duty to Rs. 600 per tonne on those selling above Rs. 190 per 50 kg bag.

But cement manufacturers refused to take the bait and have increased their retail prices after the Budget to reflect the increase in excise duty. Post-budget, cement prices are up by Rs. 12 per 50 kg bag and till the time of going to press, the Government has not succeeded in getting cement companies to reverse the decision. They are already facing an increase in the cost of critical inputs such as steel and cement and with the increased levy now, cement is costlier.

Service tax on commercial rentals

The Budget has extended service tax to those leasing and renting out commercial property and earning more than Rs. 8 lakh per annum from the same. The proposal has already generated opposition, as it will increase rental costs by 12.36 per cent across the board. The move is likely to affect those developing commercial property with the idea of renting or leasing them out, especially to IT/BPO outfits. Investment in commercial space to earn rental incomes, especially by venture capital funds and private funds, is just taking off in the country and their plans could suffer from this provision.

Consequently, investment in developing commercial space by those other than the users themselves is likely to slow down, especially if there is resistance from the tenants/lessees to pay the service tax.

Rentals will go up significantly due to the proposed levy ... the lease rentals will go up by 12.36 per cent. With developers and owners unlikely to absorb this tax burden, many of the occupants would be required to re-work their cost and expenditure strategy. It would be an extra burden for the occupiers, who have already seen rentals go up by 10-20 per cent last year due to increase in land prices and construction costs.

Reverse mortgage

The Budget gives a welcome leg-up to a wonderful product called reverse mortgage that is designed to help senior citizens. Roughly, this is how it works. If you are above 60 years of age and own a property with a clear title you can mortgage it to a housing finance company in return for either a lump sum payment or monthly annuity payments for a given period of time, which is generally 15 years.

At the end of the period if both you and your spouse are alive, you can continue to live in the property but you will not receive any annuity payments. The spouse can continue to live in the property even after the death of the owner/mortgager. The mortgage payments can be settled on the death of both spouses in two ways.

One, the legal heirs can opt to repay the housing finance company the loan amount along with a pre-determined interest and secure ownership of the property from the housing finance company or the latter can sell the property and redeem the loan granted by it. Any value secured in excess of the loan amount will be paid to the legal heirs.

To be sure, it could be some time before the product is introduced by the major housing finance companies as a number of legal and taxation aspects need to be clarified by the Government, especially on the capital gains tax liability for the transaction.

Housing loan rates

Housing loans don't come cheap any more. With interest rates rising across the economy, housing loan providers have been periodically adjusting their lending rates. After the latest round of increase a couple of weeks ago, floating rate loans now cost between 10.5-11 per cent while fixed loans are being lent at upwards of 12 per cent per annum.

With eight out of ten outstanding loans being of the floating variety, the liability of the borrowers has increased. Of course, they may not feel the pinch on the monthly cash outgo because housing finance companies automatically increase the tenure of the loan to reflect the higher interest rate.

But new borrowers are likely to feel the heat as EMIs do not look so attractive any more. Is this likely to cool down property prices.

Housing loans don't come cheap any more. With interest rates rising across the economy, housing loan providers have been periodically adjusting their lending rates. After the latest round of increase a couple of weeks ago, floating rate loans now cost between 10.5-11 per cent while fixed loans are being lent at upwards of 12 per cent per annum.

With eight out of ten outstanding loans being of the floating variety, the liability of the borrowers has increased. Of course, they may not feel the pinch on the monthly cash outgo because housing finance companies automatically increase the tenure of the loan to reflect the higher interest rate.

But new borrowers are likely to feel the heat as EMIs do not look so attractive any more. Is this likely to cool down property prices.
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