Last few days there has been a surge of messages from “Whatsapp Economists” with the simple theme that real estate prices will fall drastically due to Demonetisation i.e. ban on Rs 500 / Rs 1000 notes.
Here’s a few Point Summary of what actual business and economic logic says:
1. Demonetisation will flood the Banking system with funds driving down both interest rates on Deposits and Loans
2. If Interest rate on FD is just 5-7 % interest on Home Loans will come down to 7-9 % (since Banks keep an approx 2 per cent margin).
3. Historically at such Low interest rates Real Estate industry gets a massive boost as property becomes attractive to everyone: Buyers, Investors and even that invisible category called Businessmen/Professionals.
4. Even when prices are same, Apartments come within reach of Buyers due to lower EMI on Loans due to lower interest rate
5. Investors find Investing in property more attractive than earning a paltry 5-6 % on Bank Deposit as simply buying and renting out gives them more return. PLUS they create an asset and earn appreciation over a period of time PLUS they get income tax deductions
6. Shopkeepers, Retail Malls, Corporate Houses and even professionals like Doctors, Consultants, CAs jump in to buy property as they want preferred location and once that’s gone they may never get that chance again. So, they buy at the first available opportunity instead of waiting for prices to fall.
7. Demonetisation will see the most money flowing in banking system from people in the unorganized / small scale sector: Farmers, Traders, Tailors, Hoteliers, Beauty shop owners, Tuiton classes, small contractors, House Maids, Drivers, Security Guards etc. Crores of new people entering Banking system means that they will also be eligible to get bank loans and fulfill their dream of owning a house
8. Government will have money to invest in infrastructure as Banks will deploy lakhs of crores in Government Securities. With a few lakh crore at its disposal, Government can only boost funding to infrastructure schemes such as Smart City Mission, Swacch Bharat Mission, Housing for All etc which will inturn boost real estate too and make foreign investors invest in a fast developing country.
9. The amount of black money in Real Estate in Bangalore is probably much lower than the amount of black money in markets like Delhi NCR / Mumbai. Hence, the negative impact from reduction of black money (if any), would be more than offset by the increase in demand from white collared workers in the IT City.
10. While the jury is still out for Delhi NCR / Mumbai, where Housing units of price upwards of 3 Cr would see a decline in prices, it seems that the housing units of upto 1.5 Cr in Bangalore are likely to see an increased demand due to demonitization.
Conclusion:
In the final analysis, recent developments such as passing of Real Estate Regulation Act, Demonetisation, Goods and Service Tax etc combined with Government focus on infrastructure will only serve as positive factors for growth of Real Estate industry