If there is one sector that demonetisation has hit really hard it is real estate sector. Real estate stocks like DHL have fallen sharply because it would be tough for property buyers and sellers to deal in cash. Stocks of well-run companies that are dependent on demand from real estate such as Kajaria Ceramics, Cera Sanitaryware have been hit hard too. Social media (Whatsapp, facebook and twitter) which are now our prime source of information are sharing messages that a big crash in real estate and prices is round the corner. Could this happen? Here are our thoughts

 

Why it May not Crash:

 

• Well, basic economics is about price, demand and supply. If builders have had to buy land at ‘x’ prices, paid ‘y’ amount of bribes to get the scores of clearances through and then paid ‘z’ amount of money to construct the property what do you expect them to sell it for? Keep selling at a loss and go bankrupt?

 

• Demonetisation is flooding the banking system with money which could well drive down the interest rates. Rates on deposits are already down. This could be followed by reduction in interest rate on loans. Usually rate of home loans is 2% higher than that of deposit rate. If the interest rate on FD is 6.5%, then the interest on home Loans would be 8.5%. At that rate, attractiveness of property purchase increases because EMIs becomes lower. 

 

• Relative attractiveness of real estate increases as investors who avoid equity markets find fixed income unattractive at lower interest rates. Buying a property and renting it out may make more sense. 

 

Why it May Crash:

 

• Nobody really knows the real impact of demonetisation. From what we have read, no thoughtful economist sees any merit in it. India is overwhelmingly a cash economy. India is not just salaried employees in Bangalore using PayTM and credit cards to pay for Uber rides and buy from bigbasket.com. The entire trade of foodgrains, vegetable, fruits and provisions is done in cash as are large number of daily services like travel, tuitions, restaurants, small jobs, security etc. How these businesses will get back on their feet is not clear. 

 

• If the idea is to only replace the old Rs500 and Rs1,000 notes, then things will settle down. But if the idea is to remove black money then it will mean permanent downward shift in income and demand. 

 

• If the idea is to make the economy as cashless as possible then it will be very disruptive. It will mean that the government will not release high denomination notes in the same proportion, as it would mean going back to square one. If cash transactions are reduced, it will also push up costs because all goods and services will now become inclusive of service tax. This will leave lower surplus in the hands of people, which will nullify the lower interest rates.