Mumbai property prices: Destined to keep climbing higher?

The era of rising prices has well and truly descended upon us.

As if an increase in excise and service taxes were not enough, an expert committee from the urban development ministry has recommended increasing property taxes to finance urban infrastructure during the 12th Five Year Plan, according to a report in Business Standard.

The committee, which estimates Rs 40,000-50,000 crore will be required over a period of less than 20 years to create urban infrastructure, recommends raising property taxes on properties given for rent rather than self-occupied units.

[caption id=“attachment_270919” align=“alignleft” width=“380” caption=“speculators, who, by snapping up properties all over the place and hoarding them, refuse to let prices come down, continue to sit pretty.AFP”]  [/caption]

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While that is just a recommendation, it suggests the central government is not done trying to think of new ways to garner tax as it attempts to scrape funds for developing the country’s desperately-needed infrastructure.

While, in theory, the idea is admirable for its intent to boost urban infrastructure, the reality is that in cities like Mumbai, higher property taxes will make already unaffordable houses even more out of reach for the aam aadmi.

In fact, in Mumbai, the country’s most expensive real estate market, the municipal corporation is already planning to change its method of calculating property tax, currently based on rent, to one based on market price (which will raise property taxes significantly). According to a DNA story, the new tax system, in the works for a few years now, will be i ntroduced with retrospective effect from 1 April, 2010, whenever it is passed.

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That might have some implications on rents as well, if home owners decide to recoup some of those higher property tax charges from their tenants.

That’s on top of a flat stamp duty of 5 percent on all purchases within municipal corporation boundaries imposed by the Maharashtra state budget late last month. That, along with a hike in taxes on building input costs in the state Budget, and a service tax hike on property purchase and commercial lease transactions in the Union Budget, will raise the overall cost of buying property, according to this Moneycontrol report.

No wonder property transactions are slumping. Property transactions (sale and purchase of residential and commercial properties) in Greater Mumbai during January-March declined an average of 14.8 per cent, compared to 9.11 per cent during the corresponding period of the previous year, according to a_Business Standard_ report. A state government official told the newspaper that higher prices, higher interest rates and higher taxes were the reasons for the slump.

And yet home prices show no sign of declining. In fact, life only seems to get tougher for people hoping to own or rent property in cities like Mumbai.

Meanwhile, speculators, who, by snapping up properties all over the place and hoarding them, refuse to let prices come down, continue to sit pretty.

At least one newspaper, The Hindustan Times, has an interesting idea for breaking the hold of these speculators: It says the central government is considering a vacant land tax to check hoarding of properties. “There is definitely a case for Maharashtra to bring this tax, for developers have been hoarding huge tracts of land in Mumbai, Pune, Nashik and other booming cities and towns of the state. In Mumbai, though, is there a case for taking this forward and imposing a tax on vacant flats?” the report asks.

Any takers?