I have read many discussions over here about how new tax in budget placed by government on real estate is having bad effect on property mainly plots. But what about construction sector will prices of already build up properties i.E. Houses also decrease or will it remain unaffected? And how will it effect the builders? Thankyou.
Excellent question I have to say. In my view, it is not only plots that are affected because these taxes also apply to houses.
But even the impact on the plots alone is bound to hit the construction sector as well because the fewer plots that are sold the less will be opportunities for builders. While some people will divert their savings to construct on existing owned plot instead of buying more plots but many other investors will also be discouraged from trading in houses. So that will dampen the construction sector.
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@Rehan. The only bad effect on property which has been seen so far is almost a complete stop in sale purchase activity in most schemes, specially the more popular ones like Bahria, CDA and to a great extent even in DHA. It seems all players are holding their horses to see the final outcome of ongoing negotiations between government and market players. So far the news that is trickling out seems encouraging but still no one is willing to take any chances. The only adverse impact I see on construction for now is new projects might get delayed and already built up properties might be harder to sell these days, just like plots until a final announcement is made by the govt. However, I am sure most builders have the holding power to wait out this period of uncertainty.
These rules which everyone is worried about will not effect construction sector so much even if government don’t reduce or withdraw the new laws. I think so.
@Rehan. There are two important aspects of your question i.e. The budget related market valuation formula and pricing of constructed properties. As far as the market valuation formula is concerned, it does not apply to builders. For builders a separate fixed tax has been introduced on a per sq. Foot basis. Cities have been divided into three categories i.e. A, B and C and the rates for each category have been notified. So the tax will be calculated on the basis of covered area and has nothing to do with market valuation, which is implicitly reflected in the three tier rate structure for taxes.
As for market prices, that is a different issue. The pricing of any product depends on two important factors, demand and input cost. Now we know that demand for housing certainly exists and there is not going to be any long term decline on that count. Built up properties have not been the favorites of speculative investors, who normally prefer plots. So the demand we have in market now can be considered genuine by up to 80% at least.
However input costs present a grey area for now. Govt has hiked prices of cement and some finishing products categorized as luxury items in the budget, which will increase the input costs. On the other hand the biggest input cost in construction is normally the cost of land. Now if there is a significant decrease in land prices due to the proposed measures, then it will certainly allow new projects to offer lower costs and put pressure on existing projects. Although my personal feeling is that this is not likely to happen in a big way. Even if there is a small correction in land prices, most builders would prefer to retain the difference to cover the higher construction materials cost. Essentially this in my opinion points towards a stability in prices in the short term. In the medium to long term though, there is only one way prices are going to go, UP.
Thank you everyone fopr your feedback specially Raza for such a detailed explanation. I have still one question. According to reports in newspapers price of plots has already fallen by almost 30 percent because of these taxes. Is that not a big correction? I saw this news item in todays Jang newspaper
http://e.jang.com.pk/07-25-2016/pindi/pic.asp?picname=61.gif
Rehan sb i am striving hard to find a plot for someone on even a 5 percent declined rate but all in vain…Nobody sells the property like the way jang is portraying…e.g an old 40x80 house at good location in g-9/1 was 3.3 crores before budget so after the budget, as jang is claiming, the price of the house according to this ill perceived estimation should be 2.31 crores…Buy me a 40x80 old house in g-9/1 at this price and i will pay you 3 percent commission…One of my relatives is interested in buying.