India’s real estate market has seen a lot of churning of black money in the past. Even economists have been guarded in their opinions while trying to gauge the impact of demonetization on stemming black money. A lot of unaccounted wealth is tied up in real estate. However, the government is aware of this. So it is possible that the next step in curbing black money would be by way of going after real estate investments made through black money.
The Indian real estate market: A correction is imminent
Post demonetization, many people are wondering if real estate prices are going to drop. There is a finite possibility that prices will moderate in the coming months. “The reasons are obvious. Black money and corruption in real estate have been disrupted by demonetization. Cash-based transactions that were being done rampantly to save taxes and duties have been impacted. However, not all real estate property will be impacted by demonetization,” says Adhil Shetty, CEO, BankBazaar.
There are broadly two types of residential property—luxury housing and budget housing. The market for luxury housing may take a hit since this is where a great deal of undeclared income is invested. Budget homes, on the other hand, are often purchased by salaried people who pay taxes and whose incomes are declared. In such cases, property prices may not fall dramatically.
The other way to view the impact would be through the type of builders. Established builders and Tier-1 property developers tend to keep their books clean, rendering the cash component of property purchases minimal to virtually nil. “Therefore, circulation of black money in real estate transactions in case of such builders may be small. This may not be the case, however, with other builders who tend to accept cash towards sale considerations, thus developing the scope for black money circulation,” says Shetty.
Apart from demonetization, there is the Real Estate Regulatory Act (RERA), which will make the real estate market more buyer-friendly. In the past, buyers were at risk especially from unscrupulous builders and fly-by-night operators. There were cases of delays in delivery, shoddy work, and outright cheating on promised area with confusing terms such as carpet area, built area, and the like. Usually, the agreement was found heavily in favour of the builder. RERA will, however, make property deals more transparent and fair to buyers.
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The degree of impact
Though this is in the realm of speculation, most experts are of the view that property prices may correct further. This could be even more in case of luxury housing and in the resale market. As per a few reports, the prices of luxury houses have already come down by more than 30% in a few circles in Mumbai and Delhi. This will remain so for the next 2-3 years depending on how fast the economy recovers from the demonetization impact.
If the much-promised crackdown on real estate happens next year, we can see further drop in prices. However, things will eventually stabilize and honest property buyers will reap the benefits of a cleanup in real estate.
Should you buy now or wait?
Even now, despite the clear intent shown by the Central government on black money, many builders are holding onto old prices. Buyers need not hurry and can afford to wait for a few months. “Having said that, for serious buyers looking to purchase property in the immediate future, this is probably the best time to go through various options available in their city. They should carefully evaluate options, negotiate a good price with the builder, and shortlist their dream property,” advises Shetty.
The possible direction of repo rate
Demonetization has brought down inflation. In fact, the inflation number that came in a week ago is the lowest in the last few quarters. Historically, the Reserve Bank of India has been open to lowering the repo rate when inflation is under control. The “under control” inflation is usually 3-4%. We can expect the repo rate to come down in the next few months if inflation remains reigned in.
There are, however, some threats to the stability of inflation. The US Federal Reserve System has increased interest rates recently, taking the country out of the near-zero rate that has prevailed since the Great Recession. It has already resulted in capital outflow from emerging markets, including India, to the United States. “If the government takes a view on this, the RBI will find it difficult to lower the rate. Even if there is a cut in the repo rate, it may not be drastic. There are other pressures on the inflation rate, such as expected increase in the prices of fuel and food,” says Shetty.
Recently, many banks have already reduced their home loan rates by 25 basis points. These rates may go down further by another 25 basis points, but any expectation beyond this would be unrealistic. Hence, buyers should focus more on the fall in real estate prices than on home loan rate drops, and take a call on their property purchase decision.