“What we’re going through right now is an induced recession,” says Skylar Olsen, senior principal economist for real estate information company Zillow. “We made

How did the Demonetization affect Indian Real estate market?

Impact of Cash Crunch and Digital Economy push

Short term:

  • A sting conducted by a real estate channel in Mumbai indicated three things: developers were willing to stagger payments over several months if the cash portion was paid in new notes; those who wanted to pay with old notes had to pay a premium over the face value of these notes; and property dealers were eager to sell at discounts and for cash. So, the economy of cash transactions is back.
  • There has been less sales and purchases in the current environment, and a number of small or medium scale developers have stopped construction or marketing altogether, waiting for the dust to settle down.
  • Now that the money is legal and cleansed, people are looking at various new avenues to recover some of their losses, and R.O.I that is tax free is very attractive for obvious reasons. Dubai is a very sought out destination to invest in Tax-free property with solid returns for Investors and also for end users who are looking at a second home. Many taxpayers have declared income under IDS, paid hefty taxes, and have access to legal money now. And such legal money has legal use in real estate globally.
  • Home loan rates get cheaper: Demonetisation has increased the flow of money into banks from the unorganised and the small scale industrial sector by compelling these sectors to deposit their savings in banks. It has opened a window of opportunity for everyone to avail home loans at significantly lower rates allowing them to fulfill their dream of owning a home. The deflationary effect on the economy due to better liquidity will lead to price stabilisation making it a buyer’s market. The Reserve Bank of India will also have ample leg room to bring down the repo rates. Liquidity with the banks will help them translate the repo rate into lower borrowings for home loans. The rupee is also expected to strengthen in the consecutive months thereby increasing the purchasing power of consumers.With higher denomination currencies contributing to almost 85% of our total $ 250 billion currency in circulation, banks have seen an upsurge in deposits. This increased liquidity may lead to home loan rates being reduced. Impact has already been seen with some banks cutting their lending rates even without waiting for RBI directives on the same.
  • Cash transactions in land: Sellers who have been carrying out agricultural land transactions will suffer, because cash has always played a big role in such deals. Most land deals in the unorganised sector involve a cash component ranging from 10-40% in different markets. After demonetisation, ongoing and upcoming deals could see longer closure cycles. But the impact will be temporary, as it will also ensure market correction.

Long term:

  • While the demonetisation initiative by the Central government means further delays in ongoing real estate projects due to the massive cash crunch, it also paves the way for a cleaner and more transparent real estate industry in the time to come. Developers will now look for alternate funding arrangements while end-users or investors will wait for more certainty before making any move.
  • Increase in Construction on unused lands: Land hoarding has been a common activity owing to anticipation of constant increase in the value of land without adding any tangible value to it. But with real estate getting a shocker, a number of landowners would not want to keep their land unused as there is no guarantee of a constant increase in value of the land. Now, these landowners will try to create real value by allowing construction on the same. Land Banks like REstate are going to benefit a lot from such impact.

A longer version of this answer covering the effects of RERA and who are the winners from this can be viewed here