The Impact of Modi's Demonetization on the Real Estate Sector: Could Prices Surge?
Since the implementation of demonetization, much discussion has centered on the potential decline in property prices, attributing this mainly to the black money economy's dwindling influence. However, a closer analysis reveals that while short-term reactions may cause property prices to dip, long-term trends might actually propel them upwards. This article delves into the dynamics at play and provides insights into why the real estate prices might rise post demonetization.
Temporary Dip: The Immediate Impact of Demonetization
With the withdrawal of Rs.500 and Rs.1000 currency notes, the market has indeed seen a significant shift. The unprecedented cash crunch has led to a sudden unpredictability in the real estate sector. According to experts, this could cause a reduction of 30-50% in property prices. Moreover, the government's ongoing crackdown on benami properties has further added to a fragile market environment, creating panic among investors and consumers.
The withdrawal of large denomination notes has left a substantial portion of the black money economy in a lurch. This surplus, once driving the price surge in properties and commodities, is currently no longer available for speculative purposes. As a result, already stagnant price trends are expected to continue, with fewer buyers in the market and supply exceeding demand. Consequently, property prices are poised to decline further in the short term.
Long-Term Factors: Potential Upswing in Property Prices
Despite the immediate panic, several underlying factors suggest that real estate prices could rise:
Inventory Sales Will Kick Start
With reduced new land deals and projects due to strict bankers' review processes, the focus will inevitably shift to existing inventory. This realignment in supply and demand dynamics is likely to support property prices as consumers move towards existing properties. Additionally, the reduction in inventory levels could further contribute to price appreciation.
Furthermore, investors, holding substantial properties, might opt to wait before liquidating their assets. Given that builders will be forced to sell properties at full-market prices, holding onto properties until completion would maximize potential gains. This reluctance to sell could result in a surge in sales from existing inventories.
Demographic Shift and Accessibility of Loans
India's demographic profile is undergoing a transformation, with a significant portion of the population entering the service class. Despite high salaries, the service industry is facing a new challenge due to demonetization as all income is now white. Previously, a combination of 70% legal and 30% cash payment enabled builders to secure sales. However, with demonetization, builders will now demand 100% white payment, making it unaffordable for many service-class buyers.
Post demonetization, the shift towards 100% white payment could encourage buyers to take loans, making the market more accessible. Banks are likely to offer loans up to 80-85% of the purchase value, reducing the initial cash outlay for buyers and thus enhancing affordability. Additionally, falling interest rates will further aid in making real estate more attractive and affordable for the service class buyers.
Conclusion: A Mixed Bag of Outlooks
While the short-term impact of demonetization is expected to cause a temporary dip in property prices, the long-term trends indicate a potential upswing. Factors such as reduced inventory, wait-and-see attitude of investors, and enhanced accessibility of loans for white transactions suggest that real estate prices could actually rise.
It is important to keep an eye on the evolving market trends, as the full impact of demonetization unfolds over the coming months and years. Stay tuned for more updates on this evolving landscape.
References and Further Reading
For a more detailed understanding, visit the following articles:
Guardian: How will demonetisation affect real estate in India? Economic Times: Demonetisation: An analysis of its impact on the economy Business Standard: Impact of demonetisation on the Indian real estate sector