Demonetization in layman’s language means the act of removing a currency unit of its position and losing its status as legal tender for exchange. Since November 8, 2016, when Mr. Narendra Modi, Prime Minister of India addressed the nation, the country has been divided into two. One supports the decision and proclaims this as a historic move to curb corruption and the other believes it to be a decision to make things worse for the common man.
Demonetization & Real Estate
Let’s see what effect the demonetization drive has on the real estate as a whole:
- Banks to slash down Interest rates of loans : Less money to disperse in the economy led to higher interest loans. Since the banks now huge deposit base with so much money flowing into the bank accounts of people, it can lend money to a large number of people and at a lower interest rate. Moreover property buying will be in reach of everybody with loan friendly policies of the government. Speaking on this, President of Confederation of Real Estate Developers Association of India (CREDAI), Getamber Anand, stated on the current scenario “As liquidity in banks improve, banks will be compelled to lend aggressively. To do that, they will have to lower interest rates.”
- Luxury segment will be likely hit the most: Industry experts say that since premium luxury segment housing transactions mostly take place in cash, this segment will be most hit by the decision of demonetization. Reports state that the segment has already experienced 25-30% downfall in enquiries and booking since the decision has been rolled out by the government.
- Increased transparency: The demonetization drive will prove to be an image booster for the real estate sector. It will make the sector come out of the image of a prejudiced segment inducing more genuine people to buy homes and properties of their choice.
- Affordable segment not under scrutiny: The experts of the sectors claim that the affordable and mid segment will remain unaffected by this decision. The reason being the involvement of banks and financial institutions in the transactions. Most buyers in affordable segment go through the banking process to finance their buying residential or commercial property.
- Boon to organized builders: The decision is a boon for organized buyers and authentic buyers. The demonetization drive will benefit those developers who believe in practicing fair dealings and do not deal in cash/black money transactions. Cushman & Wakefiled India MD Anshul Jain on this said “The Indian real estate market which is largely fragmented and unorganized has had a reputation of being a safe haven for black money and therefore we expect to see impact on the sector.”
Demonetization & Home Loan Rate
Let’s go a little deep as how demonetization will affect Home loan rates
As a result of demonetization, the organized banking system will have a huge deposit base that means a large amount of cash will be in circulation. 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, since CASA ratio is used in computing MCLR.
As per Economic Times, the banks have already started slashing down the interest rates on loans. The flow of low cost deposits will get the bank deposit rates down and lead to a drop in lending rates as well. Here is an example of the impact that a 25 basis point cut will have on the borrowers:
If you have a loan of Rs 50 lakh at 9.5% for 20 Years: A 25 basis point cut will reduce the EMI by Rs 812 per month.
Old EMI at 9.5% is Rs 46,606 : New EMI at 9.25% becomes Rs 45,793
Lenders usually leave the EMI amount unchanged and reduce the loan term when rates are cut. The extent of reduction will depend on the balance tenure of the loan. The longer the remaining tenure, the greater the impact.
|Balance loan tenure at 9.5%||Number of EMIs reduced at 9.25%|
Source: Economic Times
A Positive Impact on Real Estate
- By passing some reforming bills for this sector, the government’s ride to make this sector transparent is on the right track. RERA (Real Estate Regulation and Development Act 2016), the Benami Transactions Act and now the demonetization move, are some of the effective steps.
- It is now evident that in the long run, only players who engage in honest transactions will survive. The end users will directly benefit from all these decisions as they will be aware of their rights, have the assurance of not being cheated by builders and no longer accept that constant rising price is a norm. People will now have the option to buy properties of their choice at affordable prices, in projects which will assuredly be delivered on time.
- It is believed that the Indian real estate sector will emerge stronger, healthier and capable of extended time frame of sustained growth. The demonetization drive was indeed a much required step for this sector to give a transparent image to this black money ailing sector. For business houses who have always believed in fair and transparent dealings, nothing will change for them.
- Demonetization is aimed to cut the supply of black money circulating in the economy and get some of it into the formal economy over time. The immediate effect is to gain through taxes against unaccountable money kept away from the formal government chains. Rohit Gera, MD, Gera Developments, asserts, “There is no doubt that sales which involve the exchange of cash will be affected. This will impact land prices too. If land prices crash on this account, there will be a likelihood of property prices coming down as well.”
It will take some time for everybody to accept the decision that the government has taken to move the country in the right decision. The real estate builders and the buyers both are waiting for some more reforms in this sector to make this sector more systematized and organized.
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