You have heard many reasons explaining how the government’s demonetisation move, will lead to a correction in property prices. Here’s another industry viewpoint that explains why there may be no price correction after all

In mid-2015, a report predicted a 50% crash in real estate prices. The logic used, was that the rental yield on real estate is very low as compared to the interest rates on bonds. Nothing akin to the prediction happened. However, the report did create a sensation. Now, another similar report is doing the rounds, which says that the demonetisation will result in real estate prices crashing by 25%-30%. The apparent logic being that black money dominates real estate transactions.

In the case of the former report, it is important to point out that rental yields in India have historically always been significantly lower than bond yields. Fair enough, there is not much published data available on historical rental yields.

Similarly, for people who believe that black money dominates real estate transactions, demonetisation is unlikely to have any negative impact on home prices, for the reasons elaborated below.

1. Institutional funds dominate real estate and not black money

In the past, due to factors like high stamp duty, ULCA, provisions for acquisition in the Income Tax Act, high rates of income tax/capital gains, lack of institutional finance etc., black money did dominate the sector. However, today, with significant efforts taken by various governments, institutional funds dominate the funding to the real estate sector, in the form of lending to developers, as well as housing finance for home purchasers.

2. Interest rates likely to reduce further

With food prices likely to come down due to a comfortable supply situation, the inflation rate is likely to move southwards. With inflation coming down and demonetisation increasing the money supply to banks, the interest rates are likely to reduce. This will have a positive impact on the demand for homes.

3. Problems with approvals will not reduce prices

There is an argument that in the absence of black money, approvals will become difficult and result in lower real estate prices. However, this argument is flawed, as fewer approvals would actually mean reduced supply, thus, inducing a hike in real estate prices.

See also: Demonetisation to impact real estate market till March 2017: Hiranandani

4. Market inefficiency will ensure impact remains insignificant

Today, close to 75% of housing transactions, comprise of new home sales by developers. As most of the purchasers opt for home loans, black money hardly has any significant role to play in new home sales.

In the resale market, there are sellers who demand cash. However, post-demonetisation, if demand does fall, the sellers in the resale market would prefer to hold their price and wait longer instead of reducing their asking price. Some sellers may even increase their asking price, justifying it on account of larger payment of capital gains tax.

The only segment where black money plays a dominant role, is land parcels in urban outskirts or semi-urban areas. Only if and when these landlords reduce their asking prices and a developer buys such a land and gets the plans approved and starts making homes on such lands, can one see some impact of demonetisation. Then again, in such areas, the land component in the cost of homes is not very high. Hence, if at all there is an impact in homes prices, it will be insignificant as well as localised.

5. More stakeholders favour rising home prices

Some may argue that overall sentiments are against investment in real estate and hence, prices may come down. However, there are also inertial forces that always work against any reduction in home prices. High real estate prices translate into higher revenues for the central government (service tax), state government (stamp duty, VAT), municipal corporations (FSI premium, development charges). Moreover, it improves the balance sheets of banks, as banks’ existing loan portfolio gets larger security cover. Any fall in prices will impact all of them negatively. Banks will be the worst affected.

6. Government property valuations to provide resistance

Over the years, the ready reckoner value (guideline value) of properties has been regularly revised and now, in many urban areas, the government valuations of properties is very close or in cases even more than the market price. So, even if demonetisation reduces the demand for real estate, transactions below guideline prices will not be registered by the authorities. This, again, will ensure that prices remain high.

(The writer is director, Shapoorji Pallonji Real Estate)