Delhi circle rates hiked even as property sales show no signs of a pick-up

Home prices may once again risewhile property purchases may fall in the national capital region (NCR) after the Delhi administrationannounced an across-the-board 20 percent increase in circle rates effective Tuesday.

Circle rates are minimum rates below which a property cannot be registered and forms the basis of stamp duty and registration charges for a property. The aim of hiking circle rates is to check the black money component in sale and purchase transactions. This is because more often than not, actual transactions take place much above the government’s prescribed rates (circle rates). While the property will be registered at circle rate prices, buyers are forced to pay a high component in black. In fact, it is very difficult to buy a house in Delhi without black money.

So in essence by increasing the circle rate the gap between the circle rate and the market rate reduces and the proportion of genuine buyers with clear, accounted money entering into property transactions increases.

“Though this may reduce transaction velocity, it also reduces the incidence of black money being parkeinto real estate asset,” said Rohan Sharma, Associate Director - Research & REIS, JLL India.

Secondly, the state governments’ treasuries gain as higher circle rates will generate higher tax collection from real estate transactions, as stamp duty is paid on a circle rate which is in sync with the market rates.

Thirdly, it may reduce the number of transactions since it implies an additional burden on property buyers in terms of higher stamp duties, resulting in marginally higher transaction costs and overall cost of ownership. Normally, paying a huge amount in black helps consumers save on stamp duty.

The Delhi government’s move ensures some amount of parity between the actual and the market price and will force consumers to pay more white money.

“Theweeding out of black money in real estate causes the market to behave in a more rational manner towards pricing of projects. Also, it makes little sense to view the added financial outlay as a wasted expenditure, as it is actually increases the investment value, and therefore potential resale value, of the property.

Finally, higher revenue for the government means more funds available for support infrastructure development. Seen in this light, bringing region’s circle rates closer to or on par with its prevailing market rates is a positive process, adds Sharma.

The circle rate has been increased to Rs 7.74 lakh per square metre of land from Rs 6.45 lakh in category A residential colonies like Greater Kailash, Defence Colony, Gulmohar Park, Panchsheel Enclave, Anandlok, Green Park, Golf Links and Hauz Khas. In category B colonies like Andrews Ganj, Kalkaji, Munirka Vihar and Nehru Enclave rates have been increased to Rs. 2.45 lakh per square metre as against the current rate of Rs. 2.04 lakh per square metre. In Category C neighbourhoods the circle rate has been hiked to Rs 1,59,840 from the current Rs 1,33,224 per square metre and in Category D areas (such as Anand Vihar, Daryaganj, Dwarka, Indraprastha Extension and Janakpuri)the new rates will be Rs 1.28 lakh per square metre as against the existing rate of Rs 1.06 lakh per square metre. ( For details on other categories, read this story ).

But one interesting feature here is the widening gap betweenA and B colonies. For instance, in Friends Colony, the circle rate is Rs 7.74 lakh per sq metre but its neighbour, New Friends Colony, has a much lower circle rate of Rs 2,45,520 per sq metre! What the realty market in NCR needs is a rationalisition of circle rates and reclassification of colony categories rather than just blanket increases in order tobridge the gap.

According to a report in The Times of India ,thecommittee on circle rates revision had suggested a uniform 20 percent to 30 percent hike for the lower categories and a steeper hike for A and B category areas. But since parliamentary elections were declared on 6 March and the code of conduct was announced, a decision was put in abeyance. And with no government at the helm, the revenue department under the approval ofLt Governor Najeeb Jung has taken the opportunity to hike the rates uniformly.

Already the Aam Aadmi Party and the Congress have opposed the decision to hike property circle rates in Delhi.

While AAP has said that in the absence of a popularly elected state government, this is a “suspect move”, which could have been “certainly avoidable”, the Congress hasdemanded an immediate rollback.

Moreover, the current increase comes at a time when property prices in NCR have remained largely flat or have slumped marginally while sales have dipped considerably.

“With the housing market already going through a slowdown, this announcement coming just before the festive season is likely to further dampen investor sentiment,” said Anshuman Magazine, CBRE South Asia Pvt Ltd Chairman & MD.

The average house price in Delhi-NCR has declined marginally by 2 percent during April-June compared with the year-ago period due to a slowdown in the property market, according to a report by realty portal 99acres.com. Areas like Defence Colony and Sheikh Sarai fell by 20 percent and 18 percent respectively during the April-June period compared the with previous quarter while localities like Greater Kailash I and Vasant Vihar have also seen a decline of 11 percent and 10 percent in Q2-2014 over Q1-2014.

According to a report in Asian Age, state revenues from stamp duty witnessed a slump of 10-12 per cent this year and the revenue department is expecting to raise Rs 200 crore in the next six months with the revised rates.

And while the official valuations of properties will rise, therevised circle rates will act as a deterrent to cash-rich investors who have made the NCR realty market a speculative hunting ground. A hike in the circle rate will force these investors to shell out more traceable funds. However, the impact on speculation will not be very significant since only limited transactions have been occurring in upbeat colonies which are most impacted by this move.