The squeeze in cash may pinch the real estate sector

The squeeze in cash may pinch the real estate sector
07/11/2017 , by , in News/Views

The already beleaguered real estate sector was dealt a body blow by demonetisation. The sector is notorious for cash deals, where circle rates account for a mere 30% of the sale value of a property; 70% being paid in cash.

Demonetisation’s impact on such deals is obvious once you look at Reserve Bank of India’s Housing Price Index (HPI). The index shows a rise in property prices during the last quarter of 2016 in most cities, compared to the previous quarter, even when other industry reports show a steep fall in sale during the same period.

Given that HPI collects official data on property transactions from registration authorities of respective state governments, there is a possibility that the price rise could be due to an increase in registration value of the property, and not its market value. While data for secondary market sale is not available, sales in the primary market came down post demonetisation. “Sales volume dropped 44% year-on-year in Q4 2016 and new launches fell…61% during the same period,” said a research report by Knight Frank India.

Even in the quarters after Q4 2016, home launches have been declining gradually as there are few buyers. According to a report by Colliers International India: “The residential market witnessed a 17% decline in the number of new launches during H1 2017 compared to H2 2016. During the H1 2017, only 40,600 new units were introduced compared to about 49,000 in H2 2016, in the prime cities which include Mumbai, Bengaluru, Chennai, Pune and National Capital Region. Luxury market has been affected the most…. The long-term impact of overall clampdown on black money, of which demonetisation was a part, will be felt the deepest in real estate.”

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