Impact Of Demonetisation On The Property Market – 5 Points to Consider

In the last couple of days, i received loads of queries on “What will be the impact of demonetisation on the property market?”. The reason for this panic is news reports on “collapse” or “Free Fall” of the property market. Many of my clients who are in a process of buying a property asked me whether to cancel the deal and should they wait for prices to fall. Quite interestingly, they are “Happily” willing to bear the loss of up to Rs 5L.

On the other hand, rumor mongering is at its peak in the property market. In city A there are rumors that builders have slashed property prices by 40% in a single day. I requested my client to directly approach the builder and clarify. They found out that nothing of that sort happened. In other words, there is a widespread panic and rumor mongering.

First come first, my suggestion to readers of this blog is not to panic. I agree that decision of demonetisation will have an impact on the Property Market. What will be this impact that only a buyer or seller can find out? You should not go by the news reports making generic statements or creating panic. It will be quite surprising for you but based on my evaluation, some pockets of property market may see price appreciation post demonetisation.  I will explain later in the post. In this post, i will share 5 points that a buyer or seller should consider to gauge the impact of demonetisation on the property market. The impact will be different in different pockets of the property market.

Impact Of Demonetisation On The Property Market – 5 Points to Consider

1. Wait for initial knee jerk reaction to get over:

There was a perception created by media that if Donald Trump becomes President of USA then the world economy is going to collapse. There was an initial knee-jerk reaction i.e. collapse in stock markets, gold prices shoot up, the dollar weakened etc. Quite surprisingly everything was back to normal in few days. The same reaction was observed during Brexit.

Similarly, the initial knee-jerk reaction of demonetisation in certain pockets but not all pockets of the property market is “correction” in property prices. The investors/buyers may get discounted property. Now you must be wondering it is good for me as a buyer. I agree but it’s like catching a falling knife. It is similar to stock market investment. You never know the floor price. Similarly, in the property market, the extent of correction will depend on the roots of black component in that particular pocket. You may get an immediate discount of 20% in certain pockets. You never know the correction of 40% is on the cards. Therefore, you may regret in future.

In my opinion, no need to panic, the buyers/investors can wait for initial knee jerk reaction to get over. Once the prices will stabilize then you can buy. You must be wondering how long will it take to get over? The answer is same i.e. it depends on the roots of black component. If the roots are deep then it will take longer and vice versa.

2. End user markets will not be impacted:

In my opinion, end user property markets like Bengaluru and Hyderabad will not be impacted by the demonetisation. On the other hand, investor markets like Delhi, Mumbai etc will be hard hit. The normal black component in investor markets is 40:60 i.e. 40% black and 60% white.

The best way to find how much property price correction is on the cards, you can check current black component in your area. The same logic holds true for no of Benami Property in an area. I strongly feel that there is a direct correlation. Therefore, if the black component in the area where you are planning to buy a property is 25% then you can expect 25% correction in property prices :)

3. Reputed Builders vs Small Builders

One of my observation is that all the reputed builders deal 100% in the white component. On the other hand, small builders always insist on the black component. Therefore, in my opinion, there will be only token price correction if you will buy from reputed builders. You can’t expect a sharp correction from reputed builders.

On the other hand, small builders who prefer cash payment in property deals will be the first one to slash the property prices. If you are buying a property from reputed builders then you need not worry much about the demonetisation.

4. Resale vs Under Construction:

This is again very dicey question whether the impact will be more on resale or under construction property. In my opinion, under construction property in low demand pockets will be most impacted. The reason being already there are no buyers and flushing out of black component will make it difficult for builders to survive and dispose of inventory.

On the other hand, the resale property of investors in high demand pocket will have maximum impact. The reason being, the investors will not prefer an increase in % of the white component to avoid being on the radar of income tax department.

For example, if i as an investor bought a property for Rs 100. Out of Rs 100, i paid Rs 70 in White and Rs 30 in Black then i will prefer to maintain the same ratio at the time of sale. Assuming, i decided to sell at Rs 150. Therefore, i will demand Rs 105 in White and Rs 45 in black. Let’s say post demonetisation,  the buyer is not willing to pay Rs 45 as a black component and i have to sell my property for Rs 150 i.e. all in white. As an investor, i will carry multiple risks. Firstly my capital gain tax liability will increase and i might come on income tax radar. Therefore, instead of Rs 150, i might be willing to sell the property at Rs 120 thus price correction in the investor-driven property market.

5. NRI Investments will Dry up

My personal conclusion is that NRI investments in the property market will dry up. Therefore, there will be a sharp correction in specific markets and builders dependent on NRI investments. There can be multiple reasons. One of the reason is NRI’s are more flexible in the black component. Normally they don’t prefer repatriation of money in their country of residence because of stricter tax rules in some countries like the USA. Mostly Indian income and investments are in property market or Gold. As India is moving towards stricter tax regime, they might shift their investments outside India. India will no longer be preferred investment destination for them.

Words of Wisdom:

I have a lot to share on this topic and i will cover more details on demonetisation in my future posts. The demonetisation will definitely impact property market but not that much as projected in news report. On the other hand, i am expecting a price appreciation in pockets with 100% white component. The reason being, all prospective buyers/investors will prefer investment in markets having least impact of demonetisation. The prices will remain stable in such markets.

At the macro level, the property was not preferred investment options for investors/buyers. In terms of investment preference, Post demonetisation, it will go a couple of notches down among all asset classes. Therefore, don’t expect unexpected returns from the property investment at least for next 5 to 7 years.

Copyright © Nitin Bhatia. All Rights Reserved.