“Roti, Kapda aur Makaan” used to be the bare necessities for a family in India. People who could manage all of three were considered as well to do. In modern times the necessities have expanded manifolds and people are working round the clock to fulfill them. However, the third of the three basic necessities has still eluded many. Nowadays, owning a house where one works has become a dream.
The rise in the price of real estate in Indian metro cities in the last decade has been extraordinary. There was more than 300% increase in real estate prices in prominent urban cities in India than about 100% increase as an average on a global scale. The steep rise in the real estate in India can be linked to the software boom in India in the early 2000s. The actual demand coupled with the anticipation of high ROI due to the estimation of huge demand in future fueled the prices.
At the same time, the real estate market in India has been very dubious and opaque. Contrary to follow the price elasticity of demand, the price of flats continued to rise in spite of huge inventory overhang. The main reason why it has remained as the top investment destination in India was the sheer amount of money laundering and black money involved in the business.
As per a report, approximately 30% of the transaction in the real estate sector in India is done with the black money.
There is a structured framework how money laundering works in a real estate transactions. The property is purchased by companies with cash-cheque compositions at reportedly low prices, which are resold within at 4 times or more purchase consideration in a short span of few months. The funds are circulated in several accounts in a circular fashion. In some cases, it is done by multiple cash deposits. Finally, everything boils down to individual sellers who demand 30-50% of the property price to be paid in black. The flat is then sold and registered close to the circle rate for evading the tax and thus the black money remains unaccounted. The unaccounted money is circulated in a loop thereby increasing its value many times.
A salaried person suffers the most by the whole scheme of things. The monthly salary is paid to him after deducting the tax on the source. As the rent of the property increases proportionally to its sale price, a large percentage of his salary is eaten by the house rent. If he still earns enough to buy a property he has to convert his tax paid money into the black after giving the due handling fee to the broker. In addition to that, the fictitious increase in rate in property price causes him to take huge loans from banks. On top of everything, there is an unknown fear of recession and job security. All these factors push the common salaried man away from purchasing his own house.
The demonetization of approximately 86% value of cash currency will freeze the black money loop in real estate sector. It will straight away lower the price by 30%.
For black money holders, there will also be a panic situation in the market. Moreover, due to the steep rise in real estate prices in short span, it will be difficult for the correction to benchmark the bottom. The already lower sentiments created by the previous measures of the government such as strong real estate bill and capped cash transaction will lubricate the downfall. Therefore, a 30-50% fall in property price of the high-value market like Delhi – NCR can be recorded in next 5-6 months. To improve the situation of the real estate market, RBI will try to cut the interest rate of loans in future which in turn will be executed by Banks to lower the housing loan rates.
The early trends in reduction in property rates have started coming down as reported by various media channels:
1. Rates of luxury property started falling down in Chandigarh
http://www.tribuneindia.com/news/chandigarh/real-estatee-prices-crash-50/323419.html
2. The demand has come down sharply in Metros.
3. Property sell halved in Mumbai & Delhi
4. Interest rate for buying property in grey market dropping from 30% to 5%:
http://economictimes.indiatimes.com/industry/banking/finance/demonetisation-interest-rates-in-grey-market-for-loans-drop-to-5-from-30/articleshow/55446162.cms
5. Care rating predicting significant drop in real estate prices :
http://www.dnaindia.com/money/report-demonetisation-to-dampen-real-estatee-demand-lower-prices-care-ratings-2274243
If you’re a salaried person, you could not have asked for more. It’s time that you should start shortlisting your dream house.
