Long touted as a mysterious and comfortable cave for black money hoarders, the real estate sector may be on the way to rebuild its own identity.
Demonetization is the first godly weapon to destroy the seeds of unaccounted wealth in the sector, but hitting it subsequently with stamp duty and project approval reforms can deliver the sector from its own flaws. The Indian real estate market is a cyclical sector, sometimes absorbing an erratic, unannounced, and unjustified price rise. Real estate has been counted as the safest haven for parking unaccounted wealth, used popularly by private investors, government servants, babus, non-resident Indians, farmers, and others in India. The sector itself has been the fecund centre of black money, perpetrating the movement of unaccounted wealth, and expediting price rise. Since it is unthinkable of real estate and back money separately, it is predicted that the demonetization reform may result in their malicious divorce.
In India, most land transactions, barring those of the corporates, but including those of urban and rural regions, cannot be completed without unaccounted elements of business deals. Interconnected transactions may be the reason for such a component. Two significant examples are the cities of New Delhi and Mumbai. About 35-40% of money paid for pre-owned or ready residential dwellings in Delhi was in black. This disparity in white and black component is the direct result of higher stamp duty rates, a government fee charged on ready reckoner rate of the area where the house is sold. A similar but more dynamic real estate market, Mumbai, has a huge disparity in its stamp duty rates and market rates, hence it is a natural ground for generation of black money to avoid higher duty costs. Aside from transaction costs, there is a large divide in the way approvals are sought for projects in different cities, where a large part of permissions and approvals granted include black component.
While there are prophecies about centralised ‘single window clearances’ for all projects in one go, there are still doubts about the motivation for black money bribes and their atrophy. Not permanently, but could have a leap of achievement in cleaning the system, thus encouraging real market prices to self-emerge. There seems to be a sticky slow down as prices are falling due to the lack of alternative funding for developers and property buyers awaiting a windfall of interest rate decline. Inspite of such an environment, a healthy appetite of home ownership is not far away as the parallel market will transfer its burden on the primary market to adjust prices as per demand.
In addition to demonetization, the upcoming enforcement of the Benami Transactions (Prohibition) Act will be a double whammy for the sector and its attraction for black money. Its lawful enforcement shall decide if the sector dissociates with its inclination to be the haven of unaccounted wealth.
As most home buyers in top metro cities use the home loan route, a drastic price fall may be ruled out, but the sector could temporarily be wounded because of distress sales and hurried selling. When one thinks of real estate investments in India, one is psychologically led to think black money. Such is the marriage that they remain inseparable. The demonetization move is likely to have a rather temporal yet not a permanent impact. With demonetization, these transactions have diminished drastically, installing fear in the minds of buyers and sellers. There is a fear that although the impact is temporal, the government, by reducing stamp duty rates or matching it with the market rates, can crush motivation for black money payment, for it would seem an inessential risk. Impacts of demonetization may be good, but are not expected to remain persistent, provided perpetual reforms of system clean-up are introduced and enforced without leniency.