WHY REAL ESTATE PRICES HAVEN’T CRASHED AFTER NOTEBANDI
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.
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."
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.
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.
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