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Effect of Demonetization on Real Estate

Mar 08, 2017

Ever since the announcement of Demonetization was made by Prime Minister of India on 8th November 2016, there has been unrest in the real estate sector in the country. The business day post the announcement saw many real estate indices falling real steep. The Nifty realty index saw a sudden downfall of 12% whereas the S&P BSE Mid Cap Index was seen falling by 11.2% as HDIL, Indiabulls, Prestige Estate and Unitech also witnessed a greater loss.

Though it is still early to gauge the impact of this recent development, its effect on the real estate sector is immediately visible.

Who Takes the Maximum Hit?

Reputed property advisers have predicted land and property prices, especially for the luxury home sector, can fall about 30% in the next three to six months. The luxury home and resale market involves maximum cash transactions, it stands to be the most affected one. The legal financial channels have been able to record small transactions in the high-end home segment, proving that heavy cash transactions are involved.

With the sudden shortage of unaccounted money in the market, there's a huge sigh of relief for the legal luxury home aspirants. This opens up a much wider bandwidth of options to choose from in the luxury home section.

Amidst this demonetization phase, the projects undertaken by credible developers will remain unaffected. As far as the buyers are concerned, those buying properties by taking home loans and carrying out transactions in the legal way, will remain unaffected by the current development.

Overall Impact on the Sector

Although there have been speculations of steep downfall in the property prices, President of Confederation of Real Estate Developers of India (Credai), Getamber Anand, confirmed that property prices are not likely to reduce sharply as predicted, as the sales drop will be temporary one. Adding to his prediction, he also stated that "As liquidity in banks will improve, banks will be compelled to lend aggressively. To do that, they will have to lower interest rates."

Higher transparency:

The major impact on the sector will be stretched due to lack of capital. According to a leading real estate consultancy's report 30% of transactions in real estate sector in India is done by cash. This will lead to the sector becoming more transparent.

Prices may fall:

One might remember that the Real Estate Regulator Bill was passed in March 2016. This has been viewed as a positive game changer to ensure regulation of real estate sector and better clarity for both buyers and sellers. With the demonetization exercise, unscrupulous elements in this market who were adept at creating bubbles thanks to high availability of cash would be forced to adopt traceable transactions.

EMIs could become easier to pay:

As there are talks of interest rates coming down faster due to demonetization, home loan rates would also fall. This would ensure that borrowers are able to save more. This can result in borrowers investing in more number of properties or buying bigger properties.

Secondary market would be impacted:

The primary market is driven by housing finance companies as they offer loans to borrowers. But the resale market would certainly be hit as it is influenced by investors flush with cash.

All in all, the early signs of demonetization bode well for the honest home buyer as he looks to explore options to buy a house.