Will New Tax Regime deflate Real Estate Prices in Long Run?

The Finance Minister of India, Smt. Nirmala Sitharaman announced the Union Budget for FY24; one of the major proposed changes made for personal taxation was that of New Tax Regime becoming default mode of filing tax by new taxpayers. The new tax regime does not provide any tax rebate on interest accrued and principal amount repayment. This was not a major issue for any individual tax payer as people who have taken loans had already opted for old tax regime for filing taxes.

But, with new proposed changes in the Income Tax provisions will result in new generation of tax payers from this year who would end up becoming part of the new tax regime and will not be able to roll back old tax regime six to eight years down the line when they would like to purchase a house.

The new tax regime will not have any significant impact in the next five years on the real estate market as huge number of taxpayers are in old regime and will continue that option keeping real estate purchase in mind.

So how will this tax move impact real estate in the long run?

First, there are huge number of tax payers who have already purchased a house and have also repaid the loan. They no longer receive HRA benefits or home loan deductions. It makes sense for them to shift to new regime and pay less tax. Once they shift to new tax regime a huge potential market would cease to exist for real estate players as huge number of people in their early or mid-40s would opt for it. This will have cascading impact for 2024 onwards as people in their forties with sufficient real estate investment would prefer to go off the real estate market and enjoy more tax benefits. It would result in declining number of mid-age customers for the real estate market which will have to look at younger population to market their new projects.

Eroding Second-home buyer Market: A number of well-paid professional may not like to keep investing in already saturated tier1&2 cities where they have professional base.  When a portion of well salaried income class would decide against additional housing and rather invest in other instruments. Then real estate industry would suffer from erosion of customer base.

Dent in Premium Housing projects: In the long run real estate players would witness dent in the purchase of premium real estate projects. This would be result of affluent salary class professionals migrating to new tax regime and not going for additional housing purchase. The impact may become visible by 2027 as real estate companies may find it hard to sell a lot of premium projects in absence of second-time or third-time buyers.

New Generation Taxpayers: As the new tax regime would become default tax filing option for next generation who would enter professional world by April 2023, they will not have home loan benefit in the personal taxation front. This will have huge bearing on the real estate buyer behaviour. By late 2020s a whole generation of taxpayers would like to make real estate purchase from affordability and quality perspective than luxury or multiple purchase point of view. This would significantly impact the high growth perspective of the industry and would alter the real estate product categories.

Intense Competition: As the number of buyers would start declining in next five years and by the end of this decade market would largely comprise of first home buyers win no-real incentives to buy expensive real estate in major metropolitan areas or even in tier-2 cities. This would result in intense competition and discount pricing to attract customers, thus reducing the margins and market attractiveness.