Demonetisation has frozen the real estate markets very quickly, and that's good news
14-Dec-2016 •Dhirendra Kumar
A couple of weeks back, I'd written about the coming real estate price crash in these pages. One easily predictable side-effect of demonetisation is a severe slowdown in real estate. A huge proportion of real estate is funded by black money and cash plays a dominant role in sustaining demand from investors. These investors, for the most part, are people who earn in black and can invest only in real estate. The disruption in the cash economy, it is reasonable to surmise, will lead to a sharp reduction of demand from such investors, leaving only the real demand of end-users in the market.
Is there any way of measuring such real demand and the price it will result in? As it happens, the rent that housing in an area fetches is a great indicator of the actual demand and a fair value of any property should be roughly 20 to 30 times the annual rent. When I wrote this initially, not long after demonetisation, there was a chorus of protest from those who were surprised and shocked at what low prices this implied. Of course, I never said that prices would decline immediately.
However, as it turns out, the freeze and collapse of real estate prices across many parts of the country has been immediate. From across the country, the number of registrations as well as the stamp duty collections are showing a decline of anywhere between 15 to 40 per cent. To take just a smattering of samples, Gujarat saw a decline of 43 per cent, Maharashtra 31 per cent, and Delhi 30 per cent. In most cases, the data is for the entire month of November so the decline would actually be sharper.
Taking everything into account, it seems to be pretty clear that we are entering a long period over which the reality will return to real estate and prices will come down to levels that real users will be able to pay out of their legitimate income. If you are one of the countless millions who haven't been able to buy a house of your own, you should be patient, the right time is not here yet. But if you are one of those who thought that real estate would always be a great investment, you should rethink that idea.