There seems to be no respite for the common man, as property prices and guidance values move up north. A look at the scenario by R.P. Deshpande

The State government has increased the guidance value on immovable property with effect from September 26, 2011. In Bangalore city, depending on the locality, the increase is said to be from 20 per cent to 100 per cent of earlier values, which were published in 2007.

Guidance values are fixed by the Stamps and Registrations Department and are revised periodically to match the revised trends in property values. Location wise, the guidance value (per sq. ft/sq. m) for land and for buildings is published. It is the benchmark at which stamp duty will have to be paid, irrespective of actual price paid for the property purchased.

If a property is purchased for lesser price than guidance value, the stamp duty charges will have to be paid as per guidance value and on the other hand, if property is purchased for higher price than the guidance value, the stamp duty charges will have to be paid on the actual higher price paid. The actual value, at which property is purchased, is known as market value.

Let us examine the effect of increase in guidance value of property in Bangalore.

Anand Rao was keen on investing in a residential site adjacent to the Outer Ring Road on Bellary Road in 2008. The rate quoted by the developer was Rs. 3,000 per sq. ft and as per guidance value the registration was to be done for Rs. 1,500 per sq. ft. For a plot of size 40 ft. x 60 ft., the total cost was Rs. 74.78 lakh (site value of Rs. 72 lakh + stamp duty and registration cost of Rs. 2.78 lakh @ 7.72 per cent of guidance value). (See table).

Cent per cent increase

Since Ananda Rao left for the U.S. in 2008, he could not invest in the property. Recently re returned to Bangalore and went back to the same developer to find that the price has gone up to Rs. 4,000 per sq. ft., but guidance value has remained the same. By the time he decided to finalise on September 30, 2011, he was surprised to find that the guidance value has gone up to Rs. 3,000 per sq. ft, an 100 per cent increase. Now, he has to shell out Rs. 101.56 lakh (site value of Rs. 96 lakh + stamp duty and registration cost of Rs. 5.56 lakh @ 7.72 per cent of guidance value).

Rao was thinking of taking a site purchase loan to the extent of Rs. 50 lakh in 2008, when the interest rate was nine per cent and the EMI for a 15-year loan was Rs. 50,714. For the same Rs. 50 lakh loan, now the interest rate is 12 per cent and EMI works out to Rs. 60,009.

Increase in guidance value also increases the cost for the developer, as he has to pay one per cent stamp duty on the guidance value of the property for a joint development agreement. Obviously, the builder or developer would pass on such extra cost on to the purchasers.

Is it scientific?

It is reported that there are many pockets where the guidance value is higher than market value, which clearly indicates the shortcoming in assessing the guidance value by the expert committee set by the government. In recent times, National Housing Bank (NHB) has come out with Residex, a mechanism which could track the movement of prices in the residential housing segment. It is also considered as an official data for fixing guidance values. But the Residex has till date not come near the prevailing property costs, due to many reasons which include black money involved in the property dealings.

To achieve sustainable growth in the housing sector and to promote the social objective of ‘housing for all', the National Housing and Habitat Policy has envisaged many reforms. One such major reform is to have uniform stamp duty charges on transfer of property across all States and stamp duty charges to gradually reduce to five per cent from 14-16 per cent of property value charged by many States. Accordingly many States in the past 10 years have reduced the stamp duty charges and as of now, in Karnataka, the duty stands at six per cent of property cost. If stamp duty is reduced, but guidance value is increased unscientifically, the very purpose of a national agenda of reducing the stamp duty rates would fail, as property buyers will have to shell out higher stamp duty charges.

Is it the right time?

In the present high inflationary economy, property costs have been moving northwards for the past three years or so. The other factors which have contributed to sharp rise in property costs are higher prices of steel, cement and other building materials, higher interest rates on project finances utilised by builders as well as individuals, increased labour costs, etc.

In such a situation, the Government should have announced some incentive for people to invest in property, as the construction sector is aptly known as the ‘driver of economy' and provides employment to more than 40 million people in the country. But unfortunately, the guidance values have increased, making it more difficult for the common man to buy his dream home.

Presently there looks to be no respite from spiralling property prices. It is still advisable for people to buy property, if it is for their own use.

Such people need to bargain hard for the price as the developer may reduce his margin and offer a better quote, in view of dwindling of sales.

And if the purchase is for purely investment, it is advisable to adopt a wait and watch policy for the next six months or so.

(The author is Director, Institute of Home Finance, and can be contacted at deshpanderp2007