Investment School: Should you buy real estate now?

Should you buy real estate now?

Recently i read an article in Economic Times(not a opinion or sensex target kind of articles which is usually a trade mark of ET). This article was all about stats. The article was about the advance tax paid by the real estate companies.

What is Advance tax?

Advance tax is a tax paid by individuals who earn in addition to monthly income and corporates. These are paid in three installments,

1. Sep 15 - upto 30% of advance tax should be paid
2. Dec 15 - upto 60% of advance tax should be paid
3. March 15 - upto 100% of advance tax should be paid.

Take the following example:

Gross total income: Rs 160,500
Salary (Rs 100,000), income from house property (Rs 48,000), income from other sources (Rs 12,500)

Deductions: Rs 14,500
Section 80D (Rs 2,500), section 80L (Rs 12,000)

Net income: Rs 146,000

Total tax: Rs 15,970
Tax on net income (Rs 20,020) - section 88 rebate (Rs 5,500) + 10 per cent surcharge (Rs 1,452)

Net balance: Rs 10,000
Total tax (Rs 15,970) - TDS (Rs 5,972)

Taking the above example, Rs 3,000 by September 15; Rs 3,000 (60 per cent of Rs 10,000 - Rs 3,000) by December 15 and the balance Rs 4,000 by March 15.

So coming back to the article which i read, the following are the advance tax paid by some of the leading real estate companies and it gives useful insights on where the real estate market is heading towards.

1.DLF - NIL Vs 37 Crores paid on Sep 15 2007

2.Omaxe - NIL Vs 37.5 Crores paid on Sep 15 2007

3.HDIL - NIL Vs 30 Crores paid on Sep 15 2007

4.Unitech - 50 Crores Vs 100 Crores paid on Sep 15 2007

5.Ansal Properties - 5 Crores Vs 10 Crores paid on Sep 15 2007

What does this signify?

Real estate companies has paid NIL to fewer crores of advance tax because they expect far lesser revenue than the last year.

Why lower revenue expected?

Simple logical conclusion - They have sold lesser properties and many properties across the nation have no takers because of high interest rate and high cost of the property.

What can we expect out of lower revenue?

Builders build apartments by taking loan from banks at a much higher interest rate. At one point of time when there are no takers for the property, they will be forced to reduce the price of the property or even sell the properties at throw away prices like what is happening in US currently.

So real esate prices are in for a correction next to equities and think twice before you buy a property at this juncture.

Note : This is my personal assesment of the situation. You should take your decision after applying your thoughts and calculations.

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Manish Chauhan said...

Nice article , What do you think on the rental incomes coming down or going up . How should it be related to property prices ?


Subramanian said...

Rental income should also go down as with the real estate prices.

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