The Effects of Demonetization on the Real Estate Market: A Retrospective

Demonetization, the sudden decision by the Indian government to scrap high-value currency notes, had a significant impact on the economy. While its effects were felt across various sectors, the real estate market was among the most affected. In this retrospective, let us take a closer look at the effects of demonetization on the real estate industry.

The Policy Change:

In November 2016, the government withdrew the INR 1,000 and INR 500 notes from circulation. The move aimed at curbing black money, limiting corruption and counterfeiting amongst other objectives. Immediate chaos gripped the country, with long lines of people queuing outside banks and ATMs. As the days turned into weeks, the impact of demonetization on various industries began to show.

Real Estate Before Demonetization:

Before demonetization, the real estate industry in India was heavily dependent on cash transactions. The industry was known to function on large amounts of unaccounted cash transactions, a phenomenon referred to as black money. Precisely, the primary source of black money was thought to be the use of cash for the payment of property transactions, particularly for underhand deals, which had become ubiquitous in the industry.

Effects of Demonetization:

The demonetization move struck a significant blow to the real estate industry in India. While the intentions of the policy were noble, its implications were vast. The most severe effect of demonetization was that it significantly impacted the primary market sales of property. The impact of demonetization on the secondary market sales (resale of property) was limited, although it did register a slowdown.

Impact on Property Prices:

In the short term, there was a fall in property prices throughout the country. As a large percentage of the industry's cash transactions were executed with demonetized notes, cash crunches were prevalent. With the crackdown on black money, the property prices dropped suddenly, which led to a drop in property demand.

Impact on Developers:

Demonetization meant that cash flow in the industry was choked off. This was a problem for small developers who lacked access to institutional credit. Additionally, developers were now required to show the sources of their capital, leading to a slowdown in projects. Given the cash intensive nature of the industry that relied mainly on black money, most developers faced liquidity crises during the first few months of demonetization.

Impact on Buyers:

Demonetization slowed down demand considerably. The fall in property prices, driven by the lack of liquidity as a result of demonetization, was an excellent opportunity for genuine investors. Several developers were forced to offer discounts and payment plan options, making it an opportune moment for those with capital to purchase. While demand picked up following the opening of the currency exchange window, buyers sought out credible developers to ensure the safety of their investment.

Conclusion:

The long-term effects of demonetization on the real estate industry remain to be seen. While the short-term impact was significant, there is no doubt that transactions in the industry will turn more transparent with time. Demonetization could help weed out the fly-by-night developers, leaving the market to have fewer players of repute. Therefore, as the industry evolves, so will its relationship with cash, making it more equitable and less susceptible to bubbles in the future.