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Why Real Estate Prices Haven't Crashed After Notebandi

Feb 6, 2017

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Demonetisation or notebandi was expected to push down real estate prices. Some experts had said that by March 2017 real estate prices would fall by 30 per cent. This was supposed to happen because after demonetisation, the cash needed to carry out the black part of the real estate transactions would not be available.

In India, a portion of most real estate transactions is almost always carried out in black. This involves the buyer paying the seller in cash. This essentially ensures that the buyer saves on paying stamp duty, whereas the seller saves on paying a capital gains tax.

With the cash needed to carry out a part of the real estate transaction in black not being available post demonetisation, prices would fall. Or so we were told. (To know my views on the issue, click here).

The question is have real estate prices fallen in the aftermath of demonetisation? The government seems to think so. Take the case of what the Economic Survey says about this issue: "[Real estate] prices declined, as wealth fell while cash shortages impeded transactions... Prices could fall further as investing undeclared income in real estate becomes more difficult."

Sometime last week the chief economic adviser Arvind Subramanian said: "The aim of demonetisation, is in fact, to bring down real estate prices." He also added: "Real estate on the other hand, you do see a dip in prices, in sales, in launches and of course, some of it may be adverse of the economy, but in the long run, some of that is also good, because in equilibrium, the aim of demonetisation, is in fact, to bring down real estate prices."

The question is have real estate prices really fallen? Take a look at the following chart sourced from the latest Economic Survey, which Subramanian perhaps forgot to look at.


The chart essentially shows real estate launches, sales and price, over a period of time. If you look at the right-hand side of the chart, you can clearly see that the red and the blue curves have fallen at a very fast pace. This tells us that demonetisation has led to a huge slowdown in both real estate sales as well as launches.

If we look at the chart carefully, launches of new homes by builders, were down by 60 per cent by December 2016 (the end of the fourth quarter of 2016) in comparison to end 2015. The sales were down by around 40 per cent over a similar period. All of this was not because of demonetisation because both launches and sales were already falling even before demonetisation.

In comparison, the price curve just shows a small dip in the post demonetisation period, this despite the sales crashing. Also, the prices (like sales and new launches) had already been falling even before demonetisation.

So, what does all this tells us? It tells us that the contention of the Economic Survey and Arvind Subramanian of the real estate prices falling should be taken with a pinch of salt. In comparison to the fall in sales and new launches, real estate prices have barely moved.

It also tells us that the government should be carefully reading the documents that it puts out. In this case, the graph says one thing and the analysis accompanying it, says exactly the opposite thing.

So, what explains this phenomenon of falling sales and more or less flat prices? The Indian real estate scenario is always a little tricky to explain. In any other market, if sales had fallen by 40 per cent, the market would have crashed by now. So, what gives? There are no clear cut answers here but only speculative ones.

Most Indian real estate companies are fronts for the ill-gotten wealth of politicians. The builders who operate as fronts have promised a certain rate of return to politicians, and hence, are not able to cut prices. This is one possible explanation. Another explanation that keeps getting offered is the fact that the builders and politicians have made a lot of money over the years, and hence, are in no hurry to cut prices to sell the real estate inventory of homes that has been built up.

A third explanation offered is that banks which have lent money to the builders don't want them to cut prices. A fourth explanation that was offered to me by a reader was that even though home-sales fell they did not fall by as much as they should have. What does this mean? It basically means that some of the smaller builders post demonetisation, have managed to sell some of their inventory to those who had black money in the form of high denomination notes of Rs 500 and Rs 1,000.

They took this money and used it to pay off their debt to their suppliers. The suppliers then used the money and paid it off to those who they owed money to. Essentially, the demonetised notes were paid down the chain, until they reached the workers who went ahead and deposited the money into their bank accounts. So, the world worked, and black money was converted into white.

I am sure there might be other explanations for this as well. But these are the explanations that I came across and have put them out. With very little data going around, Indian real estate, as always, remains very difficult to analyse.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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23 Responses to "Why Real Estate Prices Haven't Crashed After Notebandi"

Sirajudeen

Feb 9, 2017

There is also one factor that most of us don't take into account. Unlike the west, our mindset is so set that we (all of us including developers, individual selllers etc) strongly believe that we will not and cannot lose money in real estate. This belief is due to the past experience where we had never seen a prolonged recession or similar circumstances when real estate prices dropped considerably. We have always seen prices going up, on the negative side we would have seen at the most is reduced transaction periods. We Indians prefer to wait and to our faith the prices have always caught up with our expectations though a bit belatedly.

Like (1)

KD

Feb 8, 2017

Well, there are couple of factors. Firstly, government is ridiculously increasing taxes on petrol and diesel. Therefore, it is not viable to live outside cities. Taxes on petrol / diesel in developed countries like USA is very less. This is the reason most of the people live in suburbs in USA. Secondly, in city, government is very reluctant to increase FSI norms. How many cities in India have you seen 50 story building. In USA, it is very common. Last but not least, person who rents the property has lot of rights. Most of the court cases for evicting renter lasted for more than 50 years. Therefore, even business tycoons are not renting their property. ULTIMATELY, PRICE OF ANY COMMODITY IS DETERMINED BY DEMAND AND SUPPLY.

Like (1)

SUSHIL RIHAL

Feb 7, 2017

This is why banks
capitalisation is going
on year after year
because all netas and
our PM knows that real
estate 80% money is
black money and this is
their's. By
demonetisation, they
have given money to
banks so that they can
lend to small persons
and these above said
could make money as
otherwise prices would
have crashed by another
40% by next March
itself. So
demonetisation was
itself well known trick
of our PM to destroy
poor and give subsidy
(interest rate down more
sales, more money to
above said netas and PM)
to rich people and poor
not even knowing about
it. SO DO VOTE FOR
ELECTION COMMISSION WHO
SAYS RS. 2 LACS BE GIVEN
TO THEM, WHY DON'T EC
SAY FOR DOING PAYTM TO
THEM AS OUR PM WERE
TELLING WE FARMERS TO DO
PAYTM AS IT IS EASY
ACCORDING TO OUR PM. HE
SHOULD DO PAYTM TO ALL
PAYMENTS OF ALL RALLIES.

Like (1)

SUSHIL RIHAL

Feb 7, 2017

This is why banks
capitalisation is going
on year after year
because all netas and
our PM knows that real
estate 80% money is
black money and this is
their's. By
demonetisation, they
have given money to
banks so that they can
lend to small persons
and these above said
could make money as
otherwise prices would
have crashed by another
40% by next March
itself. So
demonetisation was
itself well known trick
of our PM to destroy
poor and give subsidy
(interest rate down more
sales, more money to
above said netas and PM)
to rich people and poor
not even knowing about
it. SO DO VOTE FOR
ELECTION COMMISSION WHO
SAYS RS. 2 LACS BE GIVEN
TO THEM, WHY DON'T EC
SAY FOR DOING PAYTM TO
THEM AS OUR PM WERE
TELLING WE FARMERS TO DO
PAYTM AS IT IS EASY
ACCORDING TO OUR PM. HE
SHOULD DO PAYTM TO ALL
PAYMENTS OF ALL RALLIES.

Like (1)

Roy daSilva

Feb 6, 2017

I suspect the price curve represents the white price, hence the slope of the price curve is not closely correlated to launches and sales. Is that right?

Like (1)

N Cama

Feb 6, 2017

To cut a long story short, it seems to me to be an excellent example of the old 'lead - lag' phenomenon in economics.
Shortage of 'cash' makes it difficult (though not impossible) to conclude deals in 'black'. This also makes if difficult for developers (sellers) to offload their inventory as fast as they normally would. This leads to a marked drop in both launches and sales. However, SOME sales will always be possible, for some people; these may be very few, but as pricing may have been fixed much earlier, the sales go through, probably at only marginally lower prices. Hence your divergence between the launches / sales graphs, and the price graph.
But developers / sellers will soon need to offload all that inventory, and generate funds flows for ongoing business - which is when they will start lowering prices. And your Price graph will start catching up with the other two!

Like (1)

Dinesh Shewkani

Feb 6, 2017

The other reason is ...This govt. Has given sops back to their akaa's(their masters) in the name of tax sop to low cost housing ,RERA for less than 5000 sq mtrs allowing them to raise money from other markets.Making individuals borrow more to pay inflated price for the flats,houses by reducing interest rates even when others are raising rates and inflation not really edgkng lower ...
This is a scam and eyewash for the common people.We bleed while they creed.

Like (1)

DINESH NAYAK

Feb 6, 2017

I can offer one more explanation as to why real estate prices have not fallen. A developer has to obtain several permissions/ approvals / No Objection Certificates /clearances from a dozens of agencies. In each of them, the file moves through several hands. starting from the Inward Clerk right up to the officer competent to take the decision. Then the file moves down the line up to the Dispatch Clerk. At each of these tables, the developer has to loosen his purse strings. Everybody extracts his pound of flesh because, the attitude is "He is making obscene profits anyway. Why should I not grab some of it?" Construction cost also goes up with inflation. Hence, even if sales are slow, no businessman, least of all a real estate developer can move backwards.

Like (1)

Ullas Sharma

Feb 6, 2017

There is more to it than what is explained in the article. First, are the prices shown in the graph reflect the prices in the primary market or the secondary market?

If primary market, most large builders take payments by cheque and hence there is no dependence on cash. Smaller builders, who were taking cash, were showing lower prices than actual as the cash was the black component of the sale. Even if the primary sales prices for these small builders came down, it is the black component that would have come down and not the cheque component that is declared by the small builders.

In the secondary market also, the same logic applies as for the smaller builders. It is quite conceivable that the overall prices in the secondary market declined in the absence of /paucity of cash but the price used to register the property (the cheque component) did not come down.

Hence, when you say that real estate prices have not declined much, you are only talking about the "official" prices and not the actual prices.

There could also be a decline in the official prices in the primary market due to weaker overall demand but these happen only with a lag and the builders may resist it as along as they can due to reasons mentioned in the article.

Like (1)

KD

Feb 6, 2017

Sir, lets talk about equity. What will happen to IT stocks? Will it recover?

Like (1)
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