Demonetisation & Property Prices in 2018

property prices

In short, demonetization has reduced activity of buying & selling properties in India and most importantly has reduced the demand for buying properties since the 500 & 1,000 rupee notes got taken out of circulation in November 2016

Why?

Properties in India were the asset to store large amounts of black money. Many are confused in India, stating that black money is back – and they are correct. However, black money for very large purchases, such as real estate, have dried up substantially. Before you couldn’t even buy a house without some component being cash where the cash component could be up to 80% of the total transaction amount. Now in 2018, one would be aggressive to ask for any cash, let 10-20%. So in a large way, India’s property market was artificially supported by black money in a big way, especially for the more expensive property in Mumbai and elsewhere in India.

By no means have the full effects of demonetization been realized yet in India and this will take a couple more years for its effects to play out (ie prices to continue to go down). As of now, prices of properties have come off from properties in Mumbai to Delhi to Bangalore. However, its been largely a wait and hold the game for developers and property owners to sit back and wait for things to return to normal.

My prediction: things won’t get back to “normal” because normal involved a HUGE amount of black money. Let me put it this way, a few years back, according to India’s tax authority, only something like 50-60,000 Indians made over one crore (~$150,000) a year… meaning that most “rich” people didn’t pay taxes and hence put their money into other things, most notably, real estate. So given this demand likely won’t be coming back, we will eventually see in 2018 Indian real estate prices coming off more and more and this will likely continue in 2019 as who has the white money to afford them!? The future price dip will likely be more intense for the higher end properties rather than lower-end properties that will be supported by India’s middle class who earn salaries, white money.

Where could we be wrong with our prediction for more downside from demonetisation in 2018 and likely 2019?

As with any opinion, we could certainly be wrong – we doubt it, but we could be! If the money that has entered the stock market post demonetisation comes back into real estate then prices would certainly stabilize. Right now, it’s not tempting enough for investors in equities to pull out after the big gains they have made in 2017 and possibly again in 2018, and prices of properties in India haven’t come off enough to make it that tempting.

However, when more inventory hits the market and when there is no black money to keep demand at its previously elevated levels developers and property owners that need to sell, will have to lower their prices and this could lead to a cascading effect in 2018.