The Government must lower stamp duty and registration rates of residential property, for easy access to home loans for a larger segment of the population. This will trigger further positive growth of the economy, writes E JAYASHREE KURUP
When Prime Minister Narendra Modi demonetised Rs500 and Rs1000 currency notes last week, for many, it was the beginning of a tumultuous time ahead. With almost Rs16 lakh crore removed from the Indian monetary system, liquidity will be a major issue for those in need of big ticket finance — and, real estate is the biggest among them. The Prime Minister has, in one swoop, levelled the playing field for every Indian, as willy nilly, everyone will be operating in cheque transactions that will, and can be, tracked.
So what does this mean for the real estate sectorIJ In the past few days, there have been numerous calls from end users asking if they should hold their real estate transactions in the hope that prices will come down. The reality is that you should not expect the Rs20-80 lakh properties in the primary markets to be impacted in any significant way. Buyers will definitely be able to haggle in a few extras, but, it is unlikely that there will be any significant drop in prices in this lower and upper-middle-income housing.
The secondary markets are in a different situation altogether. The prices of transactions here are likely to fall to match the circle rates or guideline values in most cities. If they were transacting significantly over guideline values, that amount was usually transacted in cash and is expected to drop to whatever values can be declared formally. As a result, sellers have two options — to either hold the property transaction for the time being, and hold on to the property or to shrug their shoulders and sell at the best possible values. Here, there is likely to be up to 15 per cent drop in values, experts anticipate.
The impact of this slowdown in secondary markets can be significant. With primary markets in peripheral areas of cities flush with stock in various stages of completion, thanks to the slowdown in property markets over the past two years, consumers may well start buying there, instead of moving closer to well-lived in areas at a higher cost.
The second scenario that may be considered is that sellers reset their expectation, and there will be an effort to use guideline values as the base. However, as it has happened globally, to get better values on the sale transaction, they may start bundling in extras like furnishing and gadgets that are billed separately and enhance the deal value.
A third category is the high-ticket transactions that normally took place in the luxury and premium segments of the market. Here, there were two types of transactions that took place — the heavily cashed segment, usually by those who had plenty of black money in cash and, used it to buy premium properties.
There is another segment of this premium market, where highly paid professionals were buying for self-use, through formally borrowed cash. This segment is unlikely to be impacted.
So, will this segment of the market be sufficient to prop up the premium luxury market or compensate for the huge drop in sales volumes in cashIJ Maybe not, but, this would be a segment of the market that will be sustainable in the long run. While currently all cheque deals are taking place along information technology corridors, if the traditional markets switch to cheque payments, which they must eventually do, the entire market will find realistic levels.
There is also a fourth segment of the market that is likely to get active, once the conditions turn favourable. The residential property markets of India is not more than about 16 years old, when for the first time, there was a large base of consumers who got access to formal finance to purchase real estate. Over this period, the purchasing power of this category of buyers has been increasing dramatically and steadily.
A large number of the buyers who bought in the first five to eight years of this millennium are at a stage where they may have paid off their existing home loans, and are ready to start a new one. Currently, the place they stay in, would have become old. Newer modern housing options have come up with amenities like clubs, swimming pools, jogging tracks, advanced security features and superior interiors.
This group needs to sell the existing houses and use that as seed capital to purchase newer units. They were wary of the cash component in selling property. They are likely to get active, and try and sell the property in all cheque deals. This kind of end user activity is good for the Indian market and is likely to bring more formal transactions into the market.
For, this to become a norm, policy initiatives like lowering stamp duty and registration rates of residential property, easy access to home loan for a larger segment of population and incentives to redevelop older inner city areas with better infrastructure and services may be required. Then only will the move to demonetise large denomination currency become truly smart and likely to trigger positive growth of the Indian economy.
(The writer is head, editorial and advisory, Magicbricks.com)