2017 will see bumps in the Indian market as demonetisation takes its toll; however, the move may result in lower borrowing costs, more affordable housing and a more transparent property market.
India’s demonetisation move is expected to bring down property prices by up to 30% in the next few months before stability returns, say a majority of experts. Soon after Indian Prime Minister Narendra Modi announced the scrapping of old Rs 500 and Rs 1,000 notes on 8 November 2016, the sale of pre-owned houses and developer-built small properties has practically come to a standstill.
Demonetisation is supposed to crackdown on unaccounted wealth, tax evasion, terror financing and counterfeit currency. The move indeed took out 86% of the value of currency in circulation, and economists have warned that it would dent consumer demand including housing in the short term.
Cash has long played a very important component in housing transactions in India especially the secondary market, making up 20 – 50% of the purchase price. Up to 40% of the cash is believed to be black and was used to evade taxes through underreporting of official prices, as well as for laundering purpose.
The property industry is hoping that eventually, stability will return as more deposits in banks means the cash-rich banks will start lowering interest rates and lending out more. “Hopefully, the quantum of home loans will pick up after stability returns, this will spur buying again,” says an observer.
India’s real estate market resilience in the last five years can be gauged from a recent survey conducted by Urban Land Institute and PricewaterhouseCoopers LLP, which ranks Bengaluru and Mumbai ahead of cities like Tokyo and Singapore in terms of their attractiveness as real estate investment destinations.
According to reports however, most big real estate companies are debt-ridden today as they grapple with slowing sales and rising inventories. It is also widely believed that housing demand in India is driven more by speculation rather than for own stay. The high vacancy rate for luxury houses underscores the bias towards the luxury market. “Illicit incomes are likely to be used more for such activities, which may be vulnerable to getting hit by demonetisation. This could lower demand and bring down prices in the days to come,” it was reported in an Indian newspaper.
Real estate prices will certainly face downward pressure as buyers take a wait-and-see approach due to the uncertainty surrounding demonetisation. This may increase the number of motivated sellers in the secondary market as well as spur developers to offer more freebies like an additional car park, or in some cases, which are not unheard of, a car or a cow.
On the flipside, and this is what Modi was hoping for – increasing deposits with banks would lower interest rates and help in realising his government’s goal of housing for all by 2022. It would also help transform the Indian housing market into a more transparent one and put an end to its pro-rich bias, as well as encourage construction of more affordable housing.
“Whether such liquidity increase can lower borrowing costs would only be known once the process of transition from old to new currency notes and restoration of liquidity has been completed,” a consultant reportedly opines. – By Benjamin Yong.[/ihc-hide-content]