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Demonetisation - Get Ready for Property Price Hike

There are lot of whatsapp messages and news paper articles doing the rounds that the demonetisation of old currency will result in a crash in property prices. Such messages and news even though they offer a feel-good factor to common readers are far from truth. 

In mid-2015, reports predicted a 50% crash in real estate prices. The logic used, was that the rental yield on real estate is very low as compared to the interest rates on bonds. Nothing akin to the prediction happened. However, the report did create a sensation. 

When the sentiments were against investment in real estate and hence, prices should have down. But, there were also inertial forces that worked against the reduction. Central government, state government, Banks and municipal corporations had indirectly helped stopping the price fall to avoid their revenue loss.

Latest argument for Price Fall:

  • The Indian real estate market has been thriving on black money and controlling the black money will impact the buyer base, reducing the number of buyers. 
FACT: Only resale market, also called as secondary market uses significant black money. Primary market, generally of low value and mostly driven by bank loans is largely clean.

  • Absence of black money will result in making the approvals more difficult and result in lower real estate prices. 
FACT: Fewer approvals would actually mean reduced supply, thus, inducing a hike in real estate prices, not the fall.

Arguments for No Effect or Price Hike:

Theory 1:  If the developers opt for clean money in absence of black money, they have to pay a higher interest rate to purchase land, as banks do not finance land. Thus, a higher effective land cost, will result in higher final cost of building and hence, houses will be costlier. 

FACT: Theory could be right if the black money transactions are controlled, which seems to be a reality.

Theory 2: With demonetisation, some of the small developers who operate like fly-by-night players, will be affected, and will go slow on new launches. Demand will grow at the same pace for end users, same demand and less supply, will push the prices upwards.

FACT: Theory is right when seen in conjunction with real estate bill, which makes it tougher for small player to deliver of promises. Making the transactions and deal cleaner will help the customer to buy the genuine product and help the builder to price them at premium for additional confidence.

BOTTOMLINE : A closer analysis suggests that prices may only go up, as the arguments, past changes in real estate bills and stakeholders interest, do not support the apprehensions of a price crash.

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