Impact of Demonetization on Indian Real Estate Sector

New Delhi, December 14, 2016: Prime Minister Narendra Modi’s decision to demonetize Rs 500 and Rs 1000 notes has induced impacts on various sectors of Indian economy. Along with other sectors, realty sector too is bound to feel the thrust of this decision. As we are aware, real estate transactions are largely dependent on cash for facilitating tax evasion and under reporting of official prices. In such times, when hoarded cash is hard to use and the market is facing post-demonetization liquidity crunch, there is a good chance that the housing sector might witness a dip in the days to come.

India’s housing sector had put up a good show by surviving the global downturn post the economic crisis. International Monetary Fund’s Global Housing Watch reported in its latest issue that the global housing prices had regained their pre-crisis levels off late.

However, Reserve Bank of India’s housing price index states that prices of properties have increased steadily in the past five years. A recent study by Pricewaterhouse Coopers LLP and Urban Land Institute shows that people are more keen on investing in properties in the city of Mumbai and Bengaluru when compared to Tokyo and Singapore.

India’s steadiness in the residential sector should not be mistaken for a flourish in the realty sector though. Many giant corporates are under debts today. India’s housing demand is known to be steered by a desire to earn sizable capital gains in future by selling at higher prices, rather than for residential needs. Indian housing market is also popular to have a prejudice for luxury homes as opposed to small houses, which indicates that the demand is steered by richer people who are going to use the property as an investment option.

The census data of an earlier issue of Plain facts column displayed a large number of empty houses in India, confirming that these were bought with an aim to invest than to be used as a permanent residence. A lot of black money may have been used for such activities, but demonetization may soon affect this. There may be a dip in the demand for properties, thus lowering the prices in the near future.

There are many who debate that demonetization could have a positive effect on India’s residential sector. Abolition of black money might strike the pro-rich prejudice in India’s residential sector and instigate the construction of reasonable housing. Prime Minister Modi himself spoke for demonetization saying that more deposits with the banks would reduce interest rates and support government to make its housing for all 2022 dream come true. In time, when the old to new currency conversion and restoration of liquidity has successfully taken place, it would also shed light whether the liquidity increase will actually reduce borrowing costs or not. If it does have a positive effect, as Mr. Modi said, it will be the best time to buy your luxury dream home in cities like Chennai, Bangalore, Mumbai, and Hyderabad.

There is one statistic that could still be of use to gauge the scope of the residential sector before demonetization’s full effects are revealed. The Centre for Monitoring Indian Economy disclosed capex numbers that show the yearly percentage change in the new announcements in realty sector and construction projects for the September 2016 ending quarter was maximum since December 2010.

Though the numbers have never been stable, a heavy dip in upcoming projects would mean that the investors have been affected by demonetization to a great extent.

Corporate Comm India(CCI Newswire)