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India’s Demonetization Drive Hits the Real Estate Sector


India’s Demonetization Drive Hits the Real Estate Sector

 If you’re looking to sell real estate in India fast, well, you would probably be worried about the latest economic reform undertaken by the Indian government. In an effort to curb corruption, the Indian government has made Rs 500 and Rs 1000 notes redundant.

This is actually a very good step, and should go a long way in the war against corruption in India. Most corrupt politicians and bureaucrats in India horde their ill-gotten wealth in Rs 500 and Rs 1000 notes, and now they have gone bankrupt. This money, to use an Indian term, is called as “black money”.

However, this is not such a good move – at least in the short term – for those who have properties for sale in India. The reason for this is that much of India’s real estate sector is built on black money, or unaccounted wealth, which is not taxed by the government. This black money – represented by Rs 500 and Rs 1000 notes – is being taken away.

This means the real estate sector in India can no longer have prices that are artificially inflated. The global ratings company Crisil predicts a serious slowdown in the Indian real estate sector. Land prices are expected to fall and a number of real estate transactions have now been stuck.

Luxury properties are the worst hit. Prices in the high end of the real estate market have declined by 25% to 35%, at least, as sellers race to off load properties at a discount.

 Since black money has been taken out of the market, a number of investors who had invested in projects with a lot of unaccounted-for wealth are now struggling really badly. There’s been a correction on the market, and prices have been brought down to more realistic levels.

 The luxury segment of residential real estate has been the worst affected as most of the transactions here are done in cash. The real estate market in cities like Delhi, Mumbai and Kolkata is expected to crash.  The resale property segment is likely to take a big hit as well.

However, the point must be made that this is short term pain. For the last two decades, property prices in India were kept artificially high. So high that it was virtually impossible for an average Indian to buy an apartment in any of India’s cities.

An average Indian has a monthly income of $500, while a decent apartment in an Indian city costs $300,000. That means, it would take an average Indian 50 years of savings in order to buy his or her first apartment! Most take home loans for this purpose, but that leaves them indebted to the bank for practically the rest of their lives.

So taking out the source of the pain – black money or unaccounted-wealth should cause some short term pain to the system. This move has by and large been hailed by most people in India. It is expected to usher in a new era in Indian real estate, and a new way of doing things. It should bring in a much needed dose of honesty to India’s property market.

 




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