Could render home not-so-sweet home

Withdrawal of cost indexation in property transactions, although simpler to administer and resulting in lower capital gains tax, may adversely impact slower markets, typically smaller towns and less desirable districts of large cities. The new tax dispensation favours property investments that yield positive inflation-adjusted returns. Where this condition is not met - housing prices not having grown much faster than prices overall - the homeowner faces an extra tax hurdle in disposing of his property. This could cause greater illiquidity in select micro markets and affect urban growth. The same forces would be at play during a property downcycle, when homeowners may put off decisions to sell, contributing in the process to factors that led to the slump.

Since housing is prone to spatial and cyclical factors, indexing against inflation offered a built-in policy ballast. The gov may now have to put specific counter policies in place to make the housing market more liquid and less volatile. The sector has among the highest forward and backward linkages in the economy, which calls for such intervention. The supply response to housing demand is slowed by land acquisition and floor area restrictions. So far, this has been an issue specific to state and local governments. GoI may have waded into the issue with its tax proposal.

The intended objective of removing tax arbitrage to make household savings more fluid across asset classes may not be served if the housing market were to become more illiquid. It would further trap capital stranded by the varied implementation of GoI's model regulation for the real estate sector. The market is seeing a fragmentation in supply in favour of luxury and affordable homes. Prices are rising faster in these segments on account of input cost inflation and additional amenities. Middle-income housing, which makes up the bulk of demand, may be more vulnerable to the withdrawal of cost indexation.