The one sector that was expected to be hit the hardest by the government’s move to scrap high-value currency notes in early November is the construction and real estate sector. Given the widespread use of cash in real estate transactions (quite often to facilitate under-reporting of official prices and evade taxes), it was expected that the sector would bear the brunt of the currency-scrapping exercise. But capex figures from the Centre for Monitoring Indian Economy (CMIE) show that such concerns aren’t borne out by the data, at least not just yet.

The CMIE data shows that the construction and realty sector has outperformed most other sectors in the December quarter. In the quarter ending December, the sector witnessed Rs8986.38 crore worth of new projects during the quarter. This is more than double the Rs4278.25 crore seen in the same quarter last year. It is nearly three times the September 2016 quarter figure of Rs3210.58 crore.

In stark contrast to the overall capex announcements, which grew only 7.9% over the year-ago period, construction and realty saw a 110% jump over the same period (in value terms). Compared to the September quarter, all-industry capex announcements fell 34.4%. The outperformance is even more striking when one considers the respective base effects. The 7.9% growth in all-industry capex figures in the December 2016 quarter comes on the back of a 70.2% decline (or negative growth) in the December 2015 quarter. In the case of construction and realty, the triple-digit growth comes on the back of 10.2% (positive) growth in the December 2015 quarter.

The trends in the proportion of stalled projects are even more telling, as the chart below shows. The all-industry stalling percentage increased from 12.11% to 12.21%, the second straight quarter of increased stalling. Construction and realty saw stalling decrease from 10.2% to 10.07%.

An important caveat to keep in mind here is that the CMIE data is for the entire quarter, and it has not been possible to conduct a pre-8 November and post-8 November analysis. It is entirely possible that project announcements slowed down in November and December in line with other sectors after 8 November. Nonetheless, the sharp quarterly spike in the construction and realty sector and the absence of any increase in stalled projects suggests that the impact of demonetisation on the sector may have been weaker than was anticipated.

Several news reports have indicated falling demand for real estate and falling property registrations but the capex data seems to suggest that building activity continues despite the cash crunch. It is likely that anticipating a pick-up in demand, construction and realty firms have not abandoned their projects over the past quarter. It is also likely that many payments (to vendors and labourers) were deferred but projects continued apace.

The new projects announced in the December quarter include a Rs1,000 crore residential township project in Kerala by Kool Home Builders, and a Rs700 crore affordable housing project in Nagpur by the Nagpur Improvement Trust. There is also a Rs3,100 crore Dhamra Special Investment Region (SIR) Project announced by the Odisha Industrial Infrastructure Development Corporation in Odisha.

The absence of a sharp dip in real estate and construction projects over the past quarter suggests that expectations of a sharp correction in house prices may not be met.

The analysis suggests that the wait for a correction in house prices is likely to take longer. The only relief for home-buyers post demonetisation is that bank lending rates are now lower than earlier.

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