The real estate market in India has many factors that cause price inefficiencies. The outcome is that investors will stay away from real estate markets as long as these inefficiencies exist. So how can market efficiency and thereby participation be increased? The Coasian answer is that a market will yield efficient outcomes in the absence of transaction costs.
What constitutes real estate transaction costs in India? Transaction costs are of two kinds: manifest and hidden. Manifest costs are apparent. They are borne by the parties to the transaction and not the market as a whole. They are quantifiable and therefore lend themselves well to observation and possibly measurement. Hidden costs are not statutorily imposed by the government but they increase the cost of conducting transactions. They may be identified but are difficult to quantify and therefore do not lend themselves well to measurement. Some of these are borne by the parties to the transaction while others hidden costs such as price distortions are borne by the market as a whole. In a previous article we argued that price distortions are the unseen consequences of restrictive land market regulations (Uday, 2019). The table summarises this typology of transaction costs with some examples.
Typology of land market transaction costs in India
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Manifest transaction costs
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Hidden transaction costs
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Stamp duties
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Title searches
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Registration charges
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Intermediary charges
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Cost of updating government records
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Price distortions
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Having identified some transaction costs, we attempted to determine the effect of stamp duties on transaction volumes, using Mumbai as the environment under examination. We ask the question: Do transaction volumes change after an increase in stamp duty?
Our motivation for conducting this study is to gain some insights on the relationship between stamp duties as a transaction cost and transaction volumes in the Indian real estate market.
In the literature we see that stamp duties are considered as taxes that cause market inefficiencies (Maatanen and Tervio, 2019). They discourage mutually beneficial transactions and ensure that properties are not held by the people who value them the most (Mirrles et al., 2011). An increase in stamp duty leads to a decline in the number of sales (Dachis et al., 2012). This decline is attributable to a reduction in property prices (Davidoff and Leigh, 2013; Dachis et al., 2012). Similarly, elimination of stamp duties, increases transaction volumes (Best and Kleven, 2018). The literature that examines the effect of stamp duty interventions on transactions uniformly finds that transaction volumes react to stamp duty interventions.
Methodology and findings
For this study, we selected three types of transactions: conveyance, lease and mortgage. We first extracted transaction volumes data for these transaction types in Mumbai, from the website of the Department of Registration and Stamps in Maharashtra. We then calculated the total yearly transaction volumes for each of the three transaction types across all the years for which the data was available (July 2012 onwards). We extracted all notifications which amended stamp duty rates for the relevant period of the study (July 2012 - February 2020). From these, we selected the notifications applicable to conveyances, leases and mortgages only. The selected notifications were then sorted by month and year. The following interventions were studied:
• Maharashtra Tax Laws (Levy, Amendment and Validation) Act, 2012 notified on 15 April, 2012
• Maharashtra Stamp (Amendment) Act, 2015 notified on 24 April, 2015
• Maharashtra Stamp (Second Amendment) Act, 2017 notified on 7 September, 2017
• Mumbai Municipal Corporation (Second Amendment) Act, 2018 notified on 17 December, 2019
These interventions were overlaid on the transaction volumes data in the appropriate point in time. A cross-sectional observation of the effect of the increases in stamp duty on each transaction type was done.
This analysis yields the following observations:
Conveyance transactions: There are three relevant interventions in the form of amendments to the law on stamp duty rates for conveyances for the period under examination. The first amendment was notified on April 25, 2012 by Maharashtra Tax Laws (Levy, Amendment and Validation) Act, 2012. Under this amendment the stamp duty on conveyances within the limits of the Municipal Corporation was increased from 4 per cent to 5 per cent of the market value of the property. The stamp duty for conveyances within the Municipal Council and cantonment areas was increased from 3 per cent to 4 per cent of the market value of the property. In both cases, there was an increase of 1 per cent. The second amendment was notified on September 7, 2017 by Maharashtra Stamp (Second Amendment) Act, 2017. Under this amendment the stamp duty payable on transactions in Municipal Council and Cantonment areas was increased from 4 per cent to 5 per cent of the market value. The third intervention was the Mumbai Municipal Corporation (Second Amendment) Act, 2019 notified on December 17, 2019. Under this amendment a surcharge of 1 per cent is charged on conveyances in the certain areas. In these places, the stamp duty payable on conveyance transactions is effectively increased to from 5 per cent to 6 per cent of the market value.
For the first stamp duty intervention in 2012 we do not observe a drop in the transaction volumes. In fact we see a steady increase in the year 2012 despite an increase in the rate of stamp duty until 2013. After 2013, the transaction volumes are on an upward trend until 2018. We do not observe an immediate drop in transaction volumes after the second intervention. We see that the upward trend from 2016 continues despite an intervening increase in stamp duty. From the year 2018 we observe a drop in the number of registered conveyance transactions. At its lowest point, the number of registrations were the lowest since the later half of 2012. The downward trend from the year 2018 continues into 2019.
One might theorise that the drop in transaction volumes from 2018 and into 2019 are the effect of the stamp duty interventions in 2017 and 2019. However, a look at the trends in transaction volumes of leases and mortgages also reveals a fall in the number of registered transactions from the year 2018. This indicates that the reduction in transaction volumes is likely to be on account of some other variable that affected the real estate market as a whole rather than on account of the increase in stamp duty rates. Figure 1 depicts conveyance transaction volumes in Mumbai for the period from July 2012 to February 2020. The dotted lines represent relevant stamp duty interventions in the month and year of the intervention.
Lease transactions: There are two relevant interventions on stamp duty rates for lease transactions in the period under examination. The first intervention was the Maharashtra Tax Laws (Levy, Amendment and Validation) Act, 2012 notified on 15 April, 2012. This amendment applied to conveyances and not leases directly. However, we are considering this a relevant intervention for leases because the stamp duty for lease transactions is a percentage of the stamp duty for conveyance transactions. Therefore, any change in the stamp duty for conveyances will cause a consequent change to the stamp duty for lease transactions. Since the 2012 amendment increased the stamp duty for conveyances, it consequently increased the stamp duty for lease transactions. The second intervention for lease transactions was the Maharashtra Stamp (Second Amendment) Act, 2017 notified on September 7, 2017. Again, this amendment did not directly apply to lease transactions however, given the linkage between the stamp duty payable on conveyances and leases as explained above, we have included this amendment as a relevant intervention for lease transactions. Under this amendment, the stamp duty for conveyances was increased, thereby increasing the stamp duty for lease transactions.
We observe no immediate effect of the increase in stamp duty on lease transaction volumes for both interventions. However, as observed with conveyance transactions we see a continuing upward trend in transaction volumes in the period immediately after the increases in the stamp duty rates by both interventions. After 2018, we observe a downward trend in transaction volumes. This continues into 2019. This trend has been observed with conveyance and mortgage transactions as well and is therefore, likely on account of some other variable affecting the real estate market as a whole rather than the increase in stamp duty. Figure 2 depicts lease transaction volumes in Mumbai for the period from July 2012 to February 2020. The dotted lines represent relevant stamp duty interventions in the month and year of the intervention.
Mortgage transactions: There are four relevant interventions on stamp duty rates in the period under examination. The first intervention was the Maharashtra Tax Laws (Levy, Amendment and Validation) Act, 2012 notified on 15 April, 2012. While this amendment was for conveyances and not directly for mortgages, we consider this a relevant intervention because the stamp duty for mortgage transactions is a percentage of the stamp duty for conveyance transactions. Therefore, any amendment to the stamp duty for conveyances is a relevant intervention for mortgage transactions. Since the 2012 amendment increased the stamp duty for conveyances, it consequently increased the stamp duty for mortgage transactions as well. The second intervention was the Maharashtra Stamp (Amendment) Act, 2015 notified on April 24, 2015. Under this amendment, the stamp duty payable on a mortgage was increased from five hundred rupees to 0.5 per cent of the amount secured by the mortgage subject to a maximum of ten lakhs. The third intervention was notified on September 7, 2017 by the Maharashtra Stamp (Second Amendment) Act, 2017 whereby the stamp duty for some conveyances was increased to 5 per cent of the market value. Given the linkage between stamp duties for conveyances and mortgages, we have considered this a relevant intervention. The fourth intervention, is the Mumbai Municipal Corporation (Second Amendment) Act, 2019 notified on December 17, 2019. Under this amendment a surcharge of 1 per cent is charged on mortgages in the certain areas, increasing the overall stamp duty payable on mortgage transactions.
As observed in case of lease and conveyance transactions, we observe no immediate reduction in the transaction volumes after increase in stamp duty by the 2012 intervention. We do observe a fall in the transaction volumes immediately after the 2015 amendment either. This appears to be a continuation of a downward trend in mortgage transaction volumes from the beginning of 2015. While we cannot say for certain, perhaps the sharpness of the downward trend could be affected by the increase in stamp duty. One may have observed a more gradual decline in the downward trend if the stamp duty has remained unchanged. We cannot however, verify this. After the short-term reduction, transaction volumes for mortgages increase until 2018 when a a sharp decrease in the transaction volume is observable. This downturn is consistent with the downturn we observe in respect of the transaction volumes of conveyances and leases and we therefore, cannot attribute this to increased stamp duties alone. Figure 3 depicts mortgage transaction volumes in Mumbai for the period from July 2012 to February 2020. The dotted lines represent relevant stamp duty interventions in the month and year of the intervention.
Limitations:
• The study has been done for the period from July 2012 up to February 2020. This is on account of the lack of published transactions volume data for the period prior to July 2012 from the website of the Department of Registration and Stamps in Maharashtra.
• This study observes the effects of stamp duty interventions on three types of real estate transactions only.
• The increases in stamp duties have not been significant.
• We have not controlled for the effects of other events in the real estate market on transaction volumes. However, we proceed on the assumption that a change in the market as a whole will affect all three types of major transactions. For example, an increase in interest rates for home loans will affect not just conveyances but also mortgage transactions and possibly leases. The observations for 2018 are in-line with this reasoning.
• The represented data is year-on-year and does not report month-on-month changes to transaction volumes.
• The sharpness of the increase in transactions in the year 2012 maybe smaller than what is being observed as we only have data from July 2012.
• The data does not distinguish between primary and secondary market transactions or residential and commercial transactions.
Conclusion
We undertook this study to determine the effect of stamp duties on transaction volumes by attempting to answer the question: Do transaction volumes change after an increase in stamp duty? Our motivation for doing so was to gain insights on the relationship between stamp duty as a transaction cost and transaction volumes in the Indian real estate market.
We did not observe any immediate decreases in transaction volumes in Mumbai pursuant to increases in stamp duties. This is a departure from global literature which suggests that transaction volumes decline with increases in stamp duties. However, our data offers some insights which are as follows:
First, while we may not observe immediate changes in any transaction volumes pursuant to stamp duty interventions, we observe that all three types of transactions follow some common trends. For example, there is an increase in transaction volumes across all transactions types in 2017 and a significant drop in transactions across all transaction types from the year 2018. This decline continues into 2019. This is significant because it indicates the existence of market variables that affect all transactions regardless of the type of transaction. These variables appear to have a possibly greater impact on transaction volumes than changes in stamp duties do.
Further, given that stamp duties are among the larger manifest costs, it is likely that we will not be able to observe any changes in transaction volumes if smaller manifest costs are changed. The variables affecting all transactions types in common are therefore perhaps hidden costs.
Second, the lack of volatility in the period immediately following an intervention may be indicative of a thin market where only the bare minimum on-market transactions are taking place. Transaction volumes are therefore not likely to be affected by rises in stamp duty rates. This confirms our view that despite the high market value of real estate assets in Mumbai, transactions are likely to be taking place out of necessity rather than for investment purposes, unlike in other countries where such studies have been conducted.
Third, we know that real estate transactions in India have a cash component. Given this, transactions are unlikely to be significantly affected by small increases in stamp duty.
Does this also mean that the converse is true? Will reductions in stamp duties increase transaction volumes in the real estate market in India? Literature indicates that significant changes such as tax holidays have more sizeable effects on transactions (Besley et al., 2014). For instance, a temporary elimination of transaction taxes was found to increase real estate market activity by twenty per cent in the UK (Best and Kleven, 2018). Less significant reductions in stamp duties are unlikely to have a sustained and significant effect on market participation, given the state of the Indian real estate market. While small reductions in stamp duty rates may seem like low hanging fruit with which to fix the problems of a thin market, this study indicates that without addressing the other variables that appear to be affecting transaction volumes, it is likely to be a blunt policy intervention. However, governments tend to lean towards offering stamp duty concessions to boost market participation. This is not the shot in the arm that the real estate market needs.
Since the Indian real estate market appears to present a unique case, the answer to increasing participation perhaps lies in a bundle of interventions aimed at addressing and reducing both hidden and manifest transaction costs. Some of these could be the removal of land market restrictions that have distortionary effects on the market (Uday, 2019), increasing information symmetry by creating more comprehensive land records (Shaikh and Uday, 2018) and the creation of streamlined market places which allow easy trading of real estate assets.
References
Besley et al., 2014, The Incidence of Transaction Taxes: Evidence from a Stamp Duty Holiday, Timothy Besley, Neil Meads and Paolo Surico, Journal of Public Economics, Volume 119, November 2014.
Best and Kleven, 2018, Housing Market Responses to Transaction Taxes: Evidence From Notches and Stimulus in the UK, Michael Carlos Best and Henrick Jacobsen Kleven, The Review of Economic Studies, Volume 85, Issue 1, January 2018.
Dachis et al., 2012, The Effects of Land Transfer Taxes on Real Estate Markets: Evidence from the Natural Experiment in Toronto, Ben Dachis, Giles Duranton and Mathew A. Turner, Journal of Economic Geography, Volume 12, November 27, 2012.
Davidoff and Leigh, 2013, How Do Stamp Duties Affect the Housing Market?, Ian Davidoff and Andrew Leigh, Economic Society of Australia, Volume 89 No. 286, September 2013.
Maatanen and Tervio, 2019, Welfare Effects of Housing Transaction Taxes: A Quantitative Analysis with an Assignment Model, Niku Maattanen and Marko Tervio, European Research Council, 2011.
Mirrlees et al., 2011, Tax by design, James Mirrlees, Stuart Adam, Tim Besley, Richard Blundell, Stephen Bond, Robert Chote, Malcolm Gammie, Paul Johnson, Gareth Myles and James M. Poterba, Institute for Fiscal Studies, Economic and Social Research Council, September 2011.
Shaikh and Uday, 2018, Rethinking urban land records: A case study of Mumbai, Gausia Shaikh and Diya Uday, The Leap Blog, November 1, 2018.
Uday, 2019, How land laws create dead capital, Diya Uday, The Leap Blog, July 15, 2019.
Diya Uday is a senior researcher at the Finance Research Group, Mumbai and visiting faculty at the Tata Institute of Social Science, Mumbai. The author would like to thank Ajay Shah and the two anonymous referees for their comments and suggestions.
The views expressed in the post are those of the authors only. No responsibility for them should be attributed to NIPFP.