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3 years since demonetisation bursts the bubble, real estate still facing demand crunch

Amitava Chakrabarty
Demonetisation, 3 years of demonetisation, effects of demonetisation on real estate, real estate crisis, liquidity crisis in real estate, NBFCs, Housing Finance Companies, HFCs, RERA, GST, black money, Smart Cities, Housing for All 2022, affordable housing, AMRUT

Historically, real estate was considered as best place to park black money, which resulted into home prices going up many fold than realistic value due to the artificial demand. However, on November 8, 2016, demonetisation burst the bubble by chocking the flow of black money into the sector and subsequently, the clean up actions through introduction of Real Estate Regulatory Authority (RERA), Goods and Services Taxes (GST) etc never allowed bad money enter the system again.

Demonetisation hit the sector hard when things were becoming conducive for the fence-sitters to finalise their home purchases just after the sector was recovering from slow sales and increasing inventory overhang for around three years, on the back of government measures such as Smart Cities, Housing for All 2022 and AMRUT.

"Demonetisation sucked out a lot of liquidity out of system, by slowly depleting the parallel cash economy. Other reform measures that had been introduced around the same time also had major impact on the real estate sector," said Shishir Baijal, Chairman & Managing Director, Knight Frank India.

While RERA created a crunch on the supply side till all the projects became RERA certified, the Insolvency and Bankruptcy Code (IBC) also created some level of uncertainty among developers having weak finances, which led to many companies shutting shop.

However, despite lack of artificial demand, realtors preferred to hold on to their unsold inventory, keeping the prices still at unrealistic level, that was out of reach for majority of genuine buyers having no black money to pay the extra price. There might have been little room for developers to cut price, as with the greed to recover from black money holders, they may have paid extra to greedy stakeholders to buy plots, sanctioning plans etc.

"Potential buyers are only buying if there is a need to self-occupy, and speculative buyers are staying away from the market thereby contracting the market size significantly," said Baijal.

The delay in clearing unsold inventory on the other hand resulted into liquidity crisis for developers that also trapped the Non-banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) with rising level of NPAs, triggering insolvency and further crisis.

With the black money routes chocked, the government has now come up with Rs 25,000-crore real estate fund to infuse liquidity, but unless the realtors keep their greed aside and bring the prices down to realistic level, there may not be enough demands to match the supply to kick start the production cycle again.

While the stuck up costly projects remained entangled, low-cost affordable houses are in high demand, which also creating hurdle in generating demand for the unsold high-cost inventory. That also result into some unholy demands of increasing prices of affordable houses to an unaffordable level to make the unrealistically high prices of units offered by greedy developers, appear affordable.

With 3 years already passed since demonetisation, it will be good for the greedy players to realise that black money will no longer be available and bring prices at realistic level to boost demand and clear unsold inventory. It will allow them recover stuck-up money to start constructions again, so that the sector again generates employment and demand for raw materials like steel, cement etc to boost the economy.