How will demonetisation affect real estate in India?
The news about scrapping Rs 500 and Rs 1,000 notes took the nation by storm. This move by the Modi government could have a big impact on the country. The drive against black money, corruption, and terrorism may well be a masterstroke. Everyone knows that a lot of black money goes into the real estate sector. So, let us consider some of the impacts that the ban on notes could have on Indian real estate.
WILL BUYING A HOUSE BECOME AFFORDABLE?
The government’s decision could dry up black money inflow into the real estate market. This would get rid of cash transactions that are unaccounted for. The sector deals with significant amounts of cash on a daily basis. So, the sudden withdrawal of higher-denomination notes may have a short-term impact on developers. Property prices could dip in the near future as demand falls. Most buyers will avoid paying in cash at least for the next two months. The demonetisation move to curb illegal money could get support from implementation of the Real Estate Regulation Act. That means the Indian property market could witness a significant fall in price. This could make it easier for regular people to buy a house.
IMPACT ON REAL ESTATE
The decision will have a huge impact on real estate as the sector deals in large amounts of cash. Cash transactions allow developers to save on tax. Buyers get to save on stamp duty. People invest in real estate to exhaust their unaccounted cash. Now, with fewer potential buyers in the property market, the sector could see a short-term slump. Reputed builders and the primary property market may not feel a major pinch. That is because their transactions go through banks. But in the resale property market, small and unorganised builders may see a major impact. That is because their transactions involve higher reserves of cash. This may be a positive move for the industry over the long run. But there will be a big impact on ongoing real estate projects that involve cash.
IMPACT ON HOME LOAN INTEREST RATES
As more legal cash enters the banking system, the volume of bank deposits will increase. Higher deposits would result in more lending by banks. As lending increases, the interest rate charged may come down. A cut in the repo rate by the Reserve Bank of India last month already brought down the home loan interest rate. Now, with the ban on higher-denomination notes, loans are likely to become cheaper still.
TRANSPARENCY IN HOUSE BUYING
The government’s move could curb unfair trade practices in real estate by making transactions in unaccounted-for cash harder. Cashless transactions would standardise the sector. They would bring in more transparency as all transactions would happen through banks. With the emerging cashless economy, real estate may go through a major transformation. This would make the sector more organised. It would bring in transparency, tax rationalisation, and professionalism. At the same time, it could reduce corruption in the secondary real estate market.
This bold move to curb illegal money could lead to a short-term dip in the Indian real estate sector. In the coming months, demand and property prices could fall. However, once the industry recovers, it could see greater transparency and standardisation.