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."

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 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.

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.

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