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Demonetisation analysis: Will property prices increase or fall?

Ever since the demonetisation of old currency was announced by the union government, the Indian real estate industry, has been trying to ascertain the cost-benefit analysis of its impact. Those who suggest that a R

Ever since the demonetisation of old currency was announced by the union government, the Indian real estate industry, has been trying to ascertain the cost-benefit analysis of its impact. Those who suggest that a crash in property prices is imminent, base their argument on the premise that the Indian real estate market has been thriving on black money. A closer look nevertheless, suggests that prices may only go up and the fundamentals, ground realities and economic rationale, do not support the apprehensions of a price correction or crash.

Factors that affect real estate prices The RBI does not allow land finance and hence, cash transactions are all pervasive in land deals. Lenders with black money have lower interest expectations, as they cannot park this money anywhere else. Not all developers can afford clean money for land purchase, where the borrowing cost is too high. If there are supply constraints, the property prices may firm up. When foreign capital with lower ROI expectations is pumped into land deals and property, the prices will cool down.

“There is no denying that the Indian real estate market has been sustained by cash transactions, especially in cities where the business class is the major demand driver. There should be no hesitation in accepting this ground reality. However, anyone saying that the prices will only go down, is either taking a moral high ground or is completely cut off from the ground realities of how the property market functions,” says a Noida-based developer, requesting anonymity.

See also: Ban on 500 and 1,000 rupee notes: Short-term shock, long-term benefit for property market

Why property prices may increase

Theory 1: The input cost of the developers, is what determines the output cost. With black money being pumped into land purchase, the interest rate is slightly low because the lender cannot park this money anywhere else. To expect the developers to opt for clean money, means one has to pay a higher interest rate to purchase land, as banks do not finance land. Thus, a higher input cost, will result in higher output cost and hence, houses will be costlier.

Theory 2: The price of real estate, like any other asset class, is determined by demand and supply. With demonetisation and curb on the black money, some of the small developers (and maybe, even larger developers in cash-rich markets) will go slow on new launches. Demand is likely to remain static, or increase. Hence, more demand and less supply, will push the prices upwards.

Amit Oberoi, national director, knowledge systems, Colliers International, maintains that in the short-term, there will be a pause in the market. According to him, there may be little or no transactions in land, commercial sales and secondary market sales of residential units, at least for the next three months. The primary reason for this lull in the market, is that a majority of the players will get busy in figuring out how to account for their black money and reduce their losses. At the same time, investors with white money will also adopt a ‘wait and watch’ approach, in expectation of a decrease in prices.

“Developers will be negatively impacted and can expect a worsening in their cash flows. However, most grade-A developers, have stopped the practice of taking cash in primary sales. Thus, they are less likely to be impacted on an immediate basis,” says Oberoi.

The argument in favour of a correction

Meanwhile, a report by PropEquity has a contrarian view that in the aftermath of demonetisation, a market value of Rs 8,02,874 crores in residential property, is expected to be wiped off in the next 6-12 months. According to PropEquity research, residential real estate valuation in the top 42 cities in India, sold and unsold, will take a tumble and fall upto 30%, from Rs 39,55,044 crores to Rs 31,52,170 crores.

Cities Units Million sq ft Value (Rs, crores) Weighted Avg Price Rs per sq ft Expected Drop

(in %) Drop Value (Rs, crores) Value Left (Rs, crores) Gurgaon 1,96,608 407 3,16,235 6,476 20-30 79,059 2,37,176 Noida 1,88,028 306 1,74,263 5,494 20-30 43,566 1,30,697 Bangalore 5,50,876 867 4,99,914 4,845 15-25 99,983 3,99,931 Kolkata 1,83,662 238 1,17,215 3,577 10-20 17,582 99,633 Chennai 2,49,636 312 1,73,511 4,665 10-20 26,027 1,47,484 HYD 2,25,234 403 1,76,501 3,875 10-20 26,475 1,50,026 Mumbai 2,78,842 373 8,01,320 18,108 20-30 2,00,330 6,00,990 Pune 5,68,803 621 3,72,352 4,735 15-25 74,470 2,97,882 Thane 5,55,708 469 2,92,036 5,202 20-30 73,009 2,19,027 Navi Mumbai 2,45,370 233 1,51,072 4,531 15-25 30,214 1,20,858 Pan India 49,42,637 6,633 39,55,044 5,124 10-30 8,02,874 31,52,170 PropEquity Research (Residential built-up properties, all units, available and sold since 2008-20 for 42 cities)

Both the sides, suggesting a price correction and a price hike, have got their own arguments. In terms of demand and supply, the supply side will definitely be constrained and with higher input cost, the upward pressure on prices is a logical conclusion. However, only time will tell how the market moves and whether prices will fall or rise.

(The writer is CEO, Track2Realty)

By: Housing.com/news

First Published on Nov 28, 2016 04:00 pm