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Impact of Demonetization in Real Estate Sector.
In an attempt to curb black money in the economy our PM, in a surprising fashion, phased out two major currency denomination; 500 & 1000 rupee notes. This move has affected our entire nation, and it seems that overall it has been welcomed by the common man, but there is an uncertainty among people as to how effective this move will be in the long term.
Out of all the sectors that are to be affected by demonetization, it’s speculated that the real estate sector is most likely to suffer.
Below, we try to explain the effects of demonetization on real estate.
In the real estate sector, there are four types of markets: Primary, Secondary (Resale), Commercial and Investment market. Let’s read to find out how could these markets be individually impacted by this news:
Primary Market – Sale of property in new projects comprises of the primary market. This is basically buying of property directly from the builder. It is less likely to be impacted as the cash transactions in this market are minimal and most of the primary sales happen through cheque and mostly the banks are involved in this to facilitate housing loan. However, in tier 2 and tier 3 cities where there are unorganised developer’s, there is a possibility of huge involvement of cash transactions and it might be impacted.
Secondary Market – This is basically the resale market. This market is believed to be impacted the most as there are huge cash transactions involved here. Unlike the primary market where the organised builder is involved, here the owner is involved. In this market, in majority cases, part payment is settled in cash and part in the cheque. In such cases, unaccounted cash transactions are involved to save on stamp duty and taxes on long term / short term capital gain.
Commercial Market– It is the market where buying, leasing or renting of office/industrial premises takes place. Here the resale like secondary market is impacted but the renting/leasing market is not really impacted as majority transactions are in white and these are well accounted for.
Investment Market – It is the market where investors invest in the project for a short period of time and then sell the property and exit with profit booking. There are large cash transactions takes place in this market. The investors who were previously investing in properties with unaccounted money in cash will now not be able to do so in an unorganised manner. Hence this sector is most likely to be the most impacted.
Out of all the segments in real estate, the primary market is less likely to be affected as it is majorly influenced by home buyers and the transactions tend to be transparent, but we can expect 10-15% drop in the resale real estate segment.
What are your views on demonetization? Let’s know in the comment section below.