The biggest impact of the recent demonetisation move seems to be the real estate sector. Will house prices fall? Traditionally, black money has easily found its way in the real estate sector given that the government-recognised real estate prices or the Ready Reckoner prices are usually below the market prices.

The difference could be paid out in the (unaccounted) cash and it still looks very much an arm’s-length transaction escaping Income Tax attention.

Given this, house prices will fall to the extent the housing demand is elevated, just because it’s a convenient vehicle to park the black money, and not for economic reasons. Recent real estate price behaviour suggests that black money did play a part in elevating housing demand beyond the fundamental demand.

In 2015, the states of Maharashtra and Delhi, amongst others, raised Ready Reckoner prices by almost 10-40 per cent in various cities. This reduced the scope for a cash component in real estate deals. This shows up in RBI’s Housing Price Index. The house prices in Mumbai and Delhi during 2016 so far have increased at their slowest speed in the last decade and in Kolkata, prices have actually decreased year-on-year basis. But prices increased a lot in Chennai and Lucknow for example, where the Reckoner rates still lag behind the market rate, inviting black money and pushing market prices even higher and away from Reckoner prices, creating even more room for a future bubble.

That’s how a property bubble set in exponentially and that’s why it’s important to curb it in time. So, the recent ban on the high denomination cash will definitely curb the black money going to the real estate sector, thereby lowering housing prices in general.

The fall in house prices is good for future house owners but very bad for existing owners as they will see the value of their capital fall even if such a house was purchased completely out of legally-sourced money. Additionally, if the rental income drops a lot, it can lead to rise in delinquencies on home loans to some extent in the short run.

The ban will have an impact on the real economy as well especially on consumer spending to the extent that such spending was financed from black money. World Bank estimates that black economy is almost 20 per cent of Indian GDP.

Even considering a very high 80 per cent savings rate on black money and assuming that black money is used on purchases like groceries, utilities and even weddings, the ban will slow-down the spending growth by about 3-4 percentage points. This is a massive drop and can drag the economy down in the short-run.

There is also an execution issue when it comes to the case of famers who sell their produce in the wholesale local market and get paid in high denomination cash. For many of these, high denomination currency represents their life-savings. The Government must make efforts to iron out their fears and give them the confidence to deposit this money in the bank.

Having said this, the ban has great long-term benefits. In future people will find it easy to pay taxes than see the whole value of cash being lost.

The ban also increases the morale of tax-paying citizens. And regarding the short-term drag on the economy, as the American experience of the 2008 crash suggests (though in a different context), a one-time hit in the short-run is a thousand time better than a prolonged bubble!

The author is Research Director, CAFRAL, RBI.