Mr. Sushil Gupta, SRMS CET, Bareilly
The last few years have seen real estate prices increase steadily because of the artificial scarcity and demand from investors. The difference between circle area prices and the market value of land and building was unnecessarily broadening, which shocked rational investors and middle-class people who are the major buyers of real estate. The fact that these transactions were also used to invest black money is also well known, and the resultant bubble put properties out of reach for common people. Demonetization came as a surprise and forced these brokers, dealers and developers of real estate to select the right path of doing business, which not only increase the circulation of white money in the system but also paves the way for self-exploration through which they can understand themselves what is right and what is wrong for society.
Undisputable impact on real estate:
The real estate sector will be affected by the demonetization exercise, as it has traditionally seen a very high involvement of black money and cash transactions. However, almost all such incidences have been in the secondary sales market, where cash components have traditionally been a veritable ‘must’. In other words, the resale properties segment will take a big hit. However, short-term pain is inevitable when we look for any eventual long-term cure for the disease. There has for long been a strident demand to bring transparency into the sector so that it becomes more organized. And, cash dealings must necessarily be the first symptom of the disease to be dealt with.
The luxury and high-end segments of residential real estate will also see a major impact from this exercise, since it is another area which has seen a lot of cash-based payments. The legal banking/financing channels have accounted for only a small part of all transactions in this space. The demonetization move is likely to result in luxury property prices dipping by as much as 25-30% as sellers struggle to offload properties to generate liquidity. This means that luxury home buyers will suddenly have a much wider bandwidth of options to choose from.
With black money suddenly being wiped out of the market, a lot of investors who have been investing in projects with unaccounted-for money – and raising prices to book profits – will be eliminated from the system, thereby aiding a much-needed correction.
Unaffected market of real estate:
The primary market – or, more specifically, the market formed by projects undertaken by credible developers in the top 8 Indian cities – will remain more or less unaffected. This is because buyers into such projects take the home loans/finance route to buy their homes and transactions are done through legal channels. Therefore, there will not be any major impact on sales in this segment. However, there might be an impact on quite a few projects in tier 2 or 3 cities where cash has played a role even in primary residential sales. However, the turmoil in this segment will settle down in a short period of time.
Overall Impact on the sector
In the past one year, there have been a few positive and potentially long-lasting changes in the Indian real estate sector. The passing of RERA (Real Estate Regulation and Development Act 2016), the Benami Transactions Act and now the demonetization move will ensure that going forward, the sector will lose much of its historic flaws and become more transparent. Only players who conduct their business with integrity will survive. This bodes well for end-users, who will be aware of their rights, have the assurance of not being cheated and will no longer need to contend with constantly rising prices. They will be able to buy properties of their choice at affordable prices, in projects which will assuredly be delivered on time.
The demonetization exercise was a very necessary step which was bound to bring with it a tremendous shake-up wherever black money has played a major role. Over the long term, the Indian real estate sector will emerge stronger, healthier and capable of long periods of sustained growth. As of now, there is no reason for developers and investors who have conducted their dealings transparently and legally to panic. It will essentially be business as usual for them.
Is there any way of measuring such real demand and the price cuts it will result in? As it happens, the rent that housing in an area fetches is a great indicator of the actual demand and a fair value of any property should be roughly 20 to 30 times the annual rent. Not long after demonetization, there was a chorus of protest from those who were surprised and shocked at what low prices this implied. Of course, prices would not decline immediately.
However, as it turns out, the freeze and collapse of real estate prices across many parts of the country has been immediate. From across the country, the number of registrations as well as the stamp duty collections are showing a decline of anywhere between 15 to 40 percent. To take just a smattering of samples, Gujarat saw a decline of 43 percent, Maharashtra 31 percent, and Delhi 30 percent. In most cases, the data is for the entire month of November, so the decline would actually be sharper.
Taking everything into account, it seems to be quite clear that we are entering a long period over which sanity will return to real estate and prices will come down to levels that real users will be able to pay out of their legitimate income. If you are one of the countless millions who haven’t been able to buy a house of your own, you should be patient, the right time is not here yet. But if you are one of those who thought that real estate would always be a great investment, you should rethink that idea.
The true picture and impact of demonetization on real estate will soon be evident, and in all likelihood will be good news for the middle class and their most basic need: shelter at cheaper cost.
Mr. Sushil Gupta is an Assistant Professor for the MBA program at Shri Ram Murti Smarak College of Engineering & Technology, Bareilly.