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Path Finder India (P) Ltd.

Posted on: 18/04/2013

Impact Of Demonetization On Real Eastate

In any organized real estate sector, we believe that demonetization should not mislead us into believing that property prices will fall. Demonetization is only a catalyst Let us understand the long term effects of demonetization.

FIRST, the primary market, and specifically the projects undertaken by reputed and credible developers will remain unaffected. This is because the purchases made directly with the developer are routed through banks. The demand in primary market may in fact actually increase with the resale proceeds being deployed here to offset capital gain tax.

SECOND, one should believe that real estate market is at its best possible price point with no further margin with the developers to reduce prices. Due to some strong market pressures, the correction in property prices has already happened over the last 12 — 15 months. Also with substantial increase in input costs over years, virtually no scope left for any further price correction.

THIRD, demonetizing currency has also removed surplus liquidity from the market; the higher cash in the banks leads to more liquidity for the country which results in benefits to the public in many ways:

• The financial institutions will have higher lending capabilities, thereby easing availability of funds in the real estate sector.
• The effect shall force lowering of home loan interest rates in the near future, thereby making funding cheaper. We believe the rates should come down to around 7%. With things becoming more affordable, it will mean greater credit eligibility for the same income group
• Reduction in interest rate shall also lead to reduction in EMI, making rentals and EMI comparable. This in turn should attract more people to buy property.
• Demonetization will encourage more individuals to file tax returns, thus making home loan the preferred vehicle for tax saving
• Investors will find greater ROI on buying property than earning a nominal 5-6% on bank deposits, as simply buying and renting out should give them more returns
• Government will have enhanced tax collections, thereby having better fund availability to boost infrastructure development. This in turn will support organized real estate development leading to increase in demand and prices.

• • Demonetization has removed surplus liquidity from market
• • Demonetization will turn in to low inflation
• • RBI has to reduce REPO rates by 2 % or more
• • Home loan become cheaper upto 5 % 7 %
• • No misleading
• • No rates will reduce only demand will increase

• • The enormous unsold inventory has to be brought down. It starts with the cost of homes and not interest rates on home loans.
• • Much of the parallel economy (Black money) starts and ends with real estate. Bring down the cost, and the black money evaporates. Real estate is bigger than those we are searching in Swiss banks.
• • It is only in India that the rental yield on real estate is 2% and interest cost is 12%. Only fools still borrow to invest in real estate. Especially, when there is zero capital appreciation. This gap is because of black money. They have to converge, and it starts with the cost.
• • The rental cost of real estate for business is as high as 10%. Businesses cannot survive with such high cost. Many businesses will become viable if real estate costs come down.
• • The surest way of hitting at politicians and Mafia is by reducing cost of real estate. It breaks their spine and hits them where it hurts the most.
• • Real estate is now a bubble. It has to be burst before many ordinary people get sucked into it. We have to save their hard earned money from being evaporated.
• • Real estate in India costs as much as in US or any other developed country. However, Cost of living is not even 1/3. The difference has to be bridged.
• • Housing is a need, not a luxury. And land is a national asset, not to be hoarded or profiteered. State intervention through market forces and fiscal interventions must be ex existed to make home buying affordable.
• • Reducing real estate costs reduces inflation and allows RBI to work on reducing interest rates. The cycle kicks off with real estate lobby than with RBI.