1) I have been hearing that real estate prices will fall due to demonetization. Is that true? Will home prices come down?
NO & YES!
NO because the new property market which is driven by home loans usually has minimal cash component in its transactions. Chances of prices coming down in the new property market as a result of demonetization is very low.
Moreover, property prices have grown by just 3 – 4% (Y o Y) in most cities in the last 4 years – much lesser than the rate of inflation (6% +) & are closer to circle rates in most metros. Is there scope for further drop? Very unlikely.
YES because resale & land transactions have always had cash as a major component in their transactions and are likely to see a price correction. These segments will see some distress sale happening in short & medium term. Luxury properties are likely to see a higher price correction in the short term
Your cheat sheet to understand impact of demonetization on home buying
2) What is going to be the impact of demonetization on real estate?
Technically, demonetization is likely to have minimal impact on the new property market. Resale & land property markets are the ones that will be affected But because a lot of news articles do not distinguish these 3 segments while predicting impact, a negative sentiment has overtaken the market as a whole. Overall real estate transactions will be lower due to negative market sentiment for the next 3 – 6 months.
Negative sentiment – That’s where the opportunity lies.
2.a) Opportunity in the new property segment
New residential properties will see lower demand due to negative market sentiment & perceived uncertainty Builders will face a cash crunch due to sudden drop in sales To attract buyers & maintain sales volume, builders are expected to introduce attractive offers/freebies & other benefits like never before Builders are NOT likely to reduce prices because of reasons explained for question 3. But they will be willing to negotiate on prices with serious buyers across the table & offer considerable value for the same price (in form of modular kitchen, free car park etc.). If you are salaried/self employed and looking to buy your first home, next 6 months is a wonderful opportunity to save big.
Your bargaining power with the builder has just gone up a few notches.
2.b) Opportunity in resale property & land
Resale & Land segment will see a direct impact from demonetization since cash component plays a big role in these transactions. Unaccounted cash dominates in resale & this is what most articles refer to when they talk about demonetization impacting real estate Demonetization has sucked out most of the unaccounted cash from the system. Affluent buyers who could pay cash & buy are out of the market. Temporarily! This leaves just the end users with sufficient loan eligibility in the market. Lower demand would mean pressure on sellers to reduce prices Sellers with immediate need of money will go for a distress sale & be ready to sell off at a lower price.
If you get hold of such a deal in the next 6 months, you will reap the rewards in the long term
3) Will builders reduce the price of their properties?
Very unlikely. Why?
In last 4 years, property prices have grown at a lesser rate than inflation – which means properties are already being sold now at 2012 prices (priceadjusted for inflation) Most builders have acquired lands at higher costs, input costs of construction have gone up in the last few years With RERA around the corner, builders will be required to comply & cost of compliance will squeeze margins further An explicit price drop will also impact builders credibility with past & existing customers & most builders would not run that risk Instead, builders will be willing to negotiate on prices with serious buyers across the table & offer considerable freebies in form of modular kitchen, free car park etc. till the market sentiment turns positive
4) If land prices are expected to come down, won’t that bring down property prices?
Land acquisitions/transactions where cash plays a major role will witness higher impact But as we explained, not everyone might be willing to sell at lesser price. Only distress transactions will happen It will take at least 3 – 5 years for these to enter the market as fresh projects. So no short/medium term impact expected in the residential market. Anyway, given the liquidity crunch, no. of new project launches are likely to come down over the next 12 months
5) So, is now a good time to buy a property?
If you are looking to buy your first home, a big resounding YES! Why?
Reason 1: Builders would be in need of cash liquidity to fund construction & pay off wages. They would be willing to negotiate & offer the best possible price across the table to serious buyers.
Reason 2: Your options just got wider. Resale properties that were out of your budget reach earlier will now become affordable due to distress sale.
Reason 3: 90% first time home buyers fund their property purchase through home loans. With home loan rates expected to come down very soon, EMIs will go down considerably making homes cheaper or can get you a bigger home @ same price.
Its now up to smart buyers to make use of the opportunity
6) What doesthe next 6 18 months hold for a property buyer?
Though the last 3 years has always been described as a buyers market, the power a buyer could wield has just gone up a few notches. This is expected to be the case for at least the next 6 months After this phase, with loans getting cheaper, new currency coming into the system & sentiment turning positive, demand is expected to go up. Since new launches are also likely to slow down, demand for ready to move in homes already in the market will intensify. With more buyers entering at this point, prices in the primary market are most likely to go up.
7) Can I wait till another 6 months & buy a property after that?
Of course you can. Buying a Property is a big decision & you should do it only when you think is the right time for you. Only downside being after 6 months, you will be competing with more buyers & you might have to buy the same property at a slightly higher price We would suggest you to however start your search process now so you will have enough time to understand the market scenario & assess your options Also, though you don’t plan to buy a property right away, getting in touch with sellers early in your search phase will indicate you are serious & might fetch you a great offer not available else where.
Feel free to avail professional help if necessary. It would be worth it.
4 things you could do to take advantage now
Get to know your affordability – Get a pre-approved home loan & arrange funds for the 20% that has to come from your pockets Start searching for properties with a trusted advisor & have a range of suitable options ready Start getting in touch with sellers, visit the projects physically & show them you are serious Brush up on your negotiation skills. You will save a few lakhs!