The Impact of Demonetization on Property Deals May Lead to Cheaper Loans

The Indian real estate segment, hit hard by the demonetization move, is hoping to revive its fortunes in the form of cheaper loans once the financial system becomes stable. The Reserve Bank of India is likely to ease its monetary policy to give the sector a boost, which in turn could result in reduced lending rates and easier housing loans in India.

Demonetization and the Secondary Property Market

The latest government action aimed at curbing illicit transactions has had a catastrophic impact on all property deals involving black money. Earlier, many developers and property owners used to insist on the use of hard cash for payment of a significant component of the price of any deal. This has stopped post demonetization, resulting in a sharp fall in real estate prices in certain areas.

While secondary market deals have been hit by demonetization, investment in new property has also been negatively impacted by the uncertainty in the minds of the people of India. More and more people are choosing to wait before using their funds to buy property. This, in turn, is resulting in the piling up of inventories with builders and property developers, and may be followed by a sharp cut in prices by real estate companies to keep their inventories in check. Thus, buyers can hope for a continued decline in property prices in the near future at least.

The real estate segment is currently in a pause mode and the trend is likely to continue for a couple of months till the situation becomes clearer. Transactions involving land, commercial property or secondary deals may not happen for some time, with everyone busy sorting their finances.

Potential for Easing of Interest Rates

Another impact of demonetization has been the sharp inflow of funds into the banking system, which is expected to put downward pressure on the interest rate structure of the banks. Reduced dependence of banks on higher cost borrowings is likely to cut the MCLR or the Marginal Cost of Funds based Lending rate, followed by a cut in home loan interest rates. An easing of the monetary policy is also likely to have a favorable impact on the home loan interest rate scenario.

An easing of home loan interest rates is expected to result in more and more investors opting for real estate purchases over investment in bonds and fixed deposits, thus giving a fillip to the real estate segment. The move will also help builders and developers to reduce their inventories.

The government is also likely to boost housing loans in India to achieve its goal of providing houses to all by 2020. It may launch special housing schemes for first time buyers at attractive rates. However, the actual and final impact of demonetization will be visible only after several months, when the transition to the new currency is complete, the cash crunch situation is resolved and some kind of stability is achieved.