Prime Minister Narendra Modi took the nation by storm on the night of November 8 when he announced that high-value notes of Rs 500 and Rs 1000 would discontinue being legal tender from the subsequent day. His ‘surgical strike’ against black money is a touted to be a landmark decision that will hit the realty sector hard since ‘cash’ forms a major component in most transactions.
But, as the saying goes,
“THERE IS NO GAIN WITHOUT PAIN.”
In the short term, this decision will directly hit the sentiments of the realty sector, already reeling under a slowdown. In fact, the repercussions of the move can already be felt. Real estate brokers across the country opine that the past few days have been tough for them with many citing that there have been no deals.
Interestingly, the fence sitters have once again taken a back seat in anticipation that prices will see a significant drop.
So, is the move really right and far-sighted for the realty sector?
Well, as mentioned earlier, there will be more pain in the initial days but from a long-term perspective there are more positives than negatives. Let’s look at some of the major pros of this move.
Realty Sector Poised to Become More Transparent
In its quest to make the sector more transparent, the government had initiated several reforms over the last two to three years including the landmark Real Estate Regulation Act (RERA), GST, REITs and Benami Transactions (Prohibition) Amendment Act, 2016. Add to this, FDI norms were also relaxed. Interestingly, demonetization is further going to strengthen it. With no black money component, corruption will get checked from the grass root level. All this will pave way for more international investments into the Indian realty market which will be a tremendous boost to the sector on whole.
Lower Home Loan Interest Rates to Generate Housing Demand
With people queuing up in banks to deposit their old notes into their accounts, these financial havens have improved liquidity with them. In fact, RBI revealed that almost Rs 5.44 lakh crores has been deposited in banks in just eight days. With liquidity improving, banks will be forced to lend aggressively. To do that, they will need to lower interest rates. Thus, lesser interest rates and ease of loans would mean that more people would be able to apply for home loans, which will automatically generate demand for housing. This will give the realty industry a tremendous push northwards.
Realistic Property Prices to Prevail
Corruption and approvals have been the major hurdles in the realty sector. More so, these factors have been largely responsible for price inflation. Builders have to often pay a price under the tables to get project approvals, the cost of which has to be ultimately borne by consumers. But now, demonetisation coupled with the government’s next big reform (to introduce a single-window clearance system) will help reduce corruption significantly. It will thus make property relatively affordable for the masses.
Land Prices to See a drop
With the government launching a ‘surgical strike’ against black money, the cash component in property transactions will see a significant drop. As a result, there will be a fall in land prices, which could be anywhere between 15-30 % in some places. Consequently, land deals may also see a substantial dip.
Tier 2 & 3 Cities to Gain
These cities are also likely to reap in the benefits of demonetisation in the mid to long term. The government initiatives like ‘Housing for All by 2022’ and ‘100 Smart Cities’ have already had a positive impact on many of these cities. With ample job opportunities being created here, both domestic and global funds are eyeing the markets. Demonetisation will usher in more transparency and thus further propel investors’ confidence.
Affordable Housing to Remain Unfazed
In contrast to the luxury segment, affordable homes have little to worry. The scope for cash involvement here was minimal because the overall ticket price was way too small. On the other hand, prices for luxury homes may see a decline as the use of ‘cash money’ is significantly higher.
Buyers can Expect Better Pricing in the Secondary/Resale Market
In residential real estate, use of ‘cash component’ was largely seen in the secondary sales market. While in the primary market, particularly in top eight cities, projects of reputed and credible developers didn’t ‘encash’ on this trend. Also, their buyers mostly take the home loan route where all transactions are carried out through legal channels. Hence, this market is likely to remain more or less unaffected. On the other side, home buyers can expect better pricing in the secondary or resale market. Speculative pricing will take a beating in secondary sales, especially in markets such as NCR and MMR that have been thriving on speculative investments. This will eventually benefit home buyers.
To conclude, this fight against black money will definitely have its share of repercussions initially but in the long term, it’s a positive step in the right direction, essential for a developing economy.
While the wait for ‘Acche Din’ in real estate has definitely been prolonged, there is no doubt that the sector is poised for long-term sustainable growth. Let’s hope that it will be transformed as a more efficient, organised, corporatized and transparent asset class for all.