arlier we had discussed the overall impact of demonetisation on the real estate market. This clearly has the potential to derail certain sectors of real estate market. First, demonetisation will suck up a lot of cash from the system. Once the cash component vanishes into the banks, it will be replaced by only about 20% of what was there earlier. The remaining 80% of your cash has vanished. The government giveth and the government taketh away!
A lot will depend on how much cash is available. If the total amount of cash remaining is 1/5th of what it was till 8 November, obviously the pricing and payment terms have to readjust. Say, there is some property worth Rs 100 and the seller quotes 50:50 for the cash-to-cheque ratio. With the cash component gone, will the seller quote Rs 50? Obviously not. Can he quote Rs 100? He can’t do that either. The reality will lie somewhere in the middle. The possible scenarios that can emerge are as follows:
- Official prices may increase
- Overall prices may come down
- Government revenue from stamp duty may increase
- Slowdown in transactions initially till the marker finds a proper valuation in which transactions take place
- These statements apply to geographies where pricing is dual. For full cheque jurisdictions, there may not be a significant change in pricing
- Government debt will decrease, leading to a stronger government balance sheet
- Home loan rates likely to go down to 7.5 % in 12 months
- Illegal employment will decrease. Labour wages will go up
Many real estate experts will make wonderful graphs in colour and explain all of this in much greater detail in the future with long essays.
To summarise the scenario, there are 3 things most likely to occur as a fallout of demonetisation. Illiquidity will hit the agricultural land sector the hardest. There will be a major pricing review and it will be difficult to exit the market.
Semi-urban land will be the second casualty though not as badly hit as agricultural land. Even here, a pricing review is inevitable. Urban landholders are relatively safe though they will have to pay a good amount of income tax. This is a double whammy of new price discovery with extremely low liquidity. Developers have to deal with full cheques, resulting in paying a higher income tax.
Demonetisation, RERA and GST are like the trident of Shiva. Along with destruction comes transformation. Those who embrace the change will not be destroyed.