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Impact of Demonetisation On Real Estate

Impact of Demonetisation On Real Estate

Demonetisation

Entire India is on storm after the bold step taken by Modi government of scrapping Rs 500 and Rs 1000 notes on a fine night of November. Amidst much chaos of what would happen next, real estate experts started speculating the fate of Realty Sector which is known for the menace of black money. Many said that the property prices would come down and real estate market would see a downturn , but there is actually a bright side of it, mainly for the primary market.

The Indian realty sector is divided into two major categories – primary and secondary market. The primary market is an organized one where rules are followed, declarations are clear and dealings are fair. The secondary market is an unorganized one which consists of local brokers who sell mainly plots, kothis, agricultural land, etc. Since more than 95% of real estate belongs to the unorganized secondary market, buyers think that the entire ecosystem is ruptured.

Why Demonetisation is an advantage for primary real estate-

1. Increased Liquidity is Beneficial

Demonetisation has taken back surplus liquidity from the market to the banks. Higher cash in the banks will result to more liquidity in the economy in future.

Advantages of increased liquidity in the banks-

  • Higher lending capabilities of financial institutions leading to more funds for real estate

  • It is expected that EMIs will also come down which will be simpler for people to buy their own house on EMIs. This is because lending rates are likely to come down further. Due to demonetisation, a large amount of cash flow will be brought within the purview of the formal banking system through saving account deposits and low-cost current account. Since this will reduce the dependence of banks on higher cost borrowings, banks are likely to slash the marginal cost of funds based lending rate (MCLR). This will accelerate the fall in home loan interest rates.

  • Higher affordability in the market means greater purchasing power and financial credibility in the existing income

  • Cheer people to file tax returns and they will resort to home loan as a tax saving vehicle

  • Govt. will receive more amount in terms of tax and will be better positioned to fund its infrastructure reforms like Smart City Mission, better transportation infrastructure and Housing for all.

  • Increased liquidity has brought down deposits rate, which result in lower lending rates

2. Conducive Environment for Property Buying

Reduction in interest rates will automatically encourages people to invest in real estate. Needless to say, there is shortage of property in India and now that the interest rates will fall, people will think of borrowing funds from banks in the form of loans without any increase in their income. Increased affordability means more home buying capacity.

3. RERA brings accountability in the markets

Real Estate Regulatory Authority (RERA) is now available to look after the industry and will further increase credibility and transparency in the sector. It is a major step towards transforming the Indian real estate industry and making it a more transparent business.

Difficulties

1. Developers with sizeable land parcels will face difficulty due to the significant markdown in market valuations of their land banks.

2. In the near future, the sector will be under major pressure with volume and number of transactions in residential and land markets seeing a substantial downward trend.

3. Of the property markets, Delhi-National Capital Region is likely to witness a hard landing as the market is known for highest involvement of cash component.

Buyers who are dealing with organized market where purchases are scheduled through banks, need not to worry. Demonetisation has brought a ray of hope for the industry. On the other hand if we talk about unorganised or medium scale builders, they will be adversely impacted by the demonetisation decision of the Modi government.

Demonetisation is a great step towards eradication of corruption and bribery. Demonetisation will not just reduce the home loans EMI but will also benefit common man in multiple ways by saving the amount of bribe they were paying to different channels for buying a home.


Swati loves writing on real estate! Before engaging in what she thinks is ‘serious business’. Currently, she is serving the role of Content Lead and shares her knowledge to appraise investors/end-users about Indian realty sector.