How Will Demonetisation Affect Real Estate?

how will demonetisation the home buyers and real estate

Demonetisation is no doubt the single most drastic step taken by the government in recent years to curb corruption and black money. And this step of making notes of certain denominations devoid of any legal recognition has had a very deep effect on all the sectors of economy.  In very short run, demonetisation has slowed down the economy as the spending of people has gone down and conversely; the demand too has followed the suit.

In such a scenario, how does a person who is considering buying a home decide whether or not to take the final move? What effect will the demonetisation have on property market?

And there are many theories doing rounds both offline and online. Recently, there was buzz in media that real estate prices will come down drastically and the logic was since  there will be only white transactions in property and thus the black part of transaction will be no more, it will bring down the property prices. To us , this seems over simplified view of a market where so many factors are involved that decide the property rate.

Although, no one can predict accurately the trend, if we want to really understand the effect of demonetisation on real estate market, we have to take two factors into account. Those are as below :

  1. Cost of Builders is gonna shoot : Why? Because a builder has to pay numerous vendors who play their role in making of a project. And presumably a large part of their transactions were done in cash and many used this to their advantages by giving the builders discounts by avoiding taxes. But since now everything will be on paper, there is no possibility of such discounts.

    This is going to increase the cost of builder who in turn will have to factor that increased cost in the prices of his projects. And this is going to make that property costlier in primary markets. For those who are new to real estate terminology, primary market is the market where a buyer buys the property directly from a builder. Thus primary markets are not going to see slashed prices. 
  2. Cash component is gonna disappear from secondary markets : Again, for newcomers, secondary market is where property resale transactions are done. This is the same markets where many investors sell off their properties for a good return. So now, with black money going to be significantly dried up, the cash part of property transaction is going to feel the pinch. More and more transactions will be in cheque. This may bring the property prices in secondary markets down. 
  3. Organising of Indian real estate : Demonetisation will greatly organise the unorganised real estate sector. Together with regulations like RERA, property market is going to experience a lot of consolidation. Which will be very good for buyers and also for Category A builders who do their transactions on paper. 
  4. Lower Interest Rates : One more effect of demonetisation is that as more and more people deposit their cash money in banks, banks are witnessing a windfall in terms of deposits and increasing reserves. These financial institutions will lend money at low rate of interest and this will be a very good opportunity for those who want to take home loan.

If you understand all of the above points, it is very clear to see that property prices are not going down, at least not in primary markets. Secondary markets may see a reduction in prices. Overall, the present scenario is perfect for those considering buying a home as more and more reforms are on the way. At the least, one must start searching for the properties suitable to his/her budget and other preferences.

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