A report by Fitch Ratings has said that home sales are likely to continue their downward trail because of “disruption caused by demonetization and general caution on the part of buyers.”
The government’s move to de-legalise Rs 500 and Rs 1,000 notes took out 86% currency (in value terms) from the economy or nearly Rs 15 lakh crore. The property market which is touted as a major benefactor of black money, was hit hard after November 8.
According to data put together by Knight Frank Research, “The number of residential property units sold in 4Q16 fell 44% year-on-year dragging down overall units sold in 2016 by 9%. The launch of new units fell 61% year-on-year.”
Unsold inventory was already an issue plaguing the real estate sector, with high prices that kept buyers away. There were several new policies for the sector such as the new Real Estate Regulatory Act (RERA) which came into effect from May 1, 2016, with the aim to bring about transparency, and the Benami Transaction Act, to keep a check on shell or fictitious transactions. The nail in the coffin though was demonetization which took away a majority of the purchasing power of the people, also prompting them to declare their black money which has been infamously used to buy property.
Fitch Ratings said it expected home prices to come down in 2017 as the demand for residential property had weakened significantly in 4Q16 “following the demonetization of large denomination notes in November last year. Demonetization has made it harder for home buyers to use undeclared wealth for property payments,” the Fitch report said.
The report said that sellers could also be expected to cut prices of homes and properties to ensure demand doesn’t go away completely. Some small and medium property sellers have already started cutting prices to the extent of 25-30%.
While small and second-tier home builders have started offering discounts and lower selling prices, big players like Indiabulls Real Estate Limited and Lodha Developers have resisted so far.
“We expect the largest cuts to selling prices in the National Capital Region (NCR) followed by Mumbai, where unsold inventory is the highest at 16 and 10 quarters of sales, respectively, based on market estimates. The NCR is also known to have the largest cash-based economy in the country, and therefore demand is likely to suffer more from the currency demonetization than other regions.”
However, these top-tier real estate companies are expected to benefit from a long pipeline of pre-sold projects which would cushion the demonetization blow to an extent. Small players in the sector are likely to face the brunt.
Real estate players are all looking to Finance Minister Arun Jaitley now to see what he announces in the budget to change the course of the domestic real estate sector.
Dharmesh Jain, President, MCHI-CREDAI and CMD Nirmal Lifestyle said “Jaitley should give an additional interest deduction of Rs 2 lakh to buyers towards interest on loan over and above the Rs 2 lakh deduction u/s 24 under ‘Income from house property.”
Kamal Khetan, CMD Sunteck Realty, said, “We could see some relaxation in the tax rates for salaried individuals across income slabs which would boost the buying capacity of an individual. The initial benefit of the increased liquidity has already been passed on by the banks by reducing home loan rates in the beginning of the year. A tax deduction limit on home loans, especially in metro cities like Mumbai would be beneficial.