Will demonetisation end India’s housing market resilience?

Capex numbers for December quarter could signal whether demonetisation has hit investor sentiment in India’s housing market


Reserve Bank of India’s housing price index shows that prices in most Indian cities have been increasing steadily in the last five years. Photo: Mint
Reserve Bank of India’s housing price index shows that prices in most Indian cities have been increasing steadily in the last five years. Photo: Mint

If there is one sector which is expected to face significant turbulence due to Narendra Modi government’s decision to scrap old Rs500 and Rs1,000 notes, it is real estate and housing. Cash plays an important role in real estate transactions to facilitate underreporting of official prices and evade taxes. Thanks to the difficulty in using illegally hoarded cash and the post-demonetisation liquidity crunch in the market, it is being expected that housing/real estate prices might come down in the days to come.

What does this entail for India’s real estate and housing sector? India’s housing market survived the global downturn which followed the economic crisis. The latest issue of global housing watch by the International Monetary Fund (IMF) shows that global housing prices have managed to regain their pre-crisis levels only now.

In contrast, Reserve Bank of India’s (RBI) housing price index shows that prices in most Indian cities have been increasing steadily in the last five years. India’s real estate market’s resilience can be gauged from a recent survey conducted by Urban Land Institute and PricewaterhouseCoopers LLP, which ranks Bengaluru and Mumbai ahead of cities like Tokyo and Singapore in terms of their attractiveness as real estate investment destinations.

The resilience of India’s housing market prices should not be taken as a sign of all is well in India’s real estate economy though. Most big real estate companies are laden in debt today. It is also widely believed that housing demand in India is driven more by a desire to make capital gains by selling at a higher price in the future, rather than for residential purposes. The housing market in India has also had a bias towards luxury housing, instead of small houses, which underlines that the demand might be driven by richer people who are more likely to use real estate as an investment option.

An earlier Plainfacts column had cited census data showing a very high share of vacant houses in India to buttress the point that house purchases were likely to be driven by the desire to invest rather than to stay in those houses. Illicit incomes are likely to be used more for such activities, which may be vulnerable to getting hit by demonetisation. This could lower demand and bring down prices in the days to come.

To be sure, many have argued that demonetisation could also have a positive impact on India’s housing sector. Crackdown on black money might put an end to the pro-rich bias in India’s housing market and encourage construction of affordable housing. Modi himself argued that increasing deposits with banks would lower interest rates and help in realising his government’s goal of housing for all by 2022. Whether such liquidity increase can lower borrowing costs would only be known once the process of transition from old to new currency notes and restoration of liquidity has been completed.

There is one statistic which could help in gauging the mood in the housing sector before the full effects of demonetisation are known. Capex numbers released by the Centre for Monitoring Indian Economy show that year-on-year percentage change in new project announcements in the construction and real estate sector for the quarter ending September 2016 was the highest since December 2010. Although the numbers have been fluctuating in the recent past, a big fall in announcements of new projects could mean that investor sentiment has taken a hit after the demonetisation move.

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