Land prices expected to crash in the next six months

Demonetization hits hard on the real estate sector

Post demonetization, various industries in the Country have been impacted. With an aim to clamp down on the black money menace, the government banned Rs.500 and Rs.1000 notes which hit the real estate industry the hardest. Individuals used to park the black money by investing in land and buildings and the crack down on black money has brought an end to any such investment. 

It is expected that the land prices may see a 30% fall in the next two quarters. This will have a significant impact on the land prices as well as the luxury market. Individuals used these two avenues to hoard the black money. In case of land, it is assumed that 50% of the amount invested were unaccounted money and 30% were in the residential sector. Hence, the land prices will face a big blow. The cost of construction will also go down by about 25% since the builder had to pay in black to get the approvals from various authorities which will not happen anymore.

The real estate sector has already been suffering from a stagnation for the past two years. The sales were low and the prices had stagnated, in addition, there is a huge pile up of inventory which is only going to increase in the coming quarter. The unsold stock in Tier 1 cities has increased by 12% on a year on year basis. There are about 1 million unsold units in eight metros across the Country. Looking at the current rate of sales, it could take another 4 years to sell the current inventory. The banning of the higher currency note has been a major move towards increasing the transparency in the industry. The experts are hoping that in the long term, the measure will be beneficial for the industry and will increase the trust of the buyers. The move will provide a level playing field for cash as well as non cash buyers. Earlier, buyers with a huge amount of cash always had an advantage over the other buyers who could not make the payment in cash. The Registrar is supposed to inform the tax department for properties purchased or sold for over Rs. 30 lakh. Such measures aim to bring transparency in the industry.

The buyers are supposed to deduct 1% of TDS from the seller if the purchase price of the property exceeds Rs. 50 lakh and is also required to submit the money to the tax department. This will ensure that the transaction is recorded with the tax department as well. The stagnation in the sales will continue for the coming year due to the implementation of RERA and as a consequence of demonetization. In the long term, this will be seen as a benefit for the industry because the transactions will have clear documentation, be recorded with the registrar and will have increased transparency.