The Indian governmentâ€™s decision to withdraw notes of Rs 500 and Rs 1,000 was intended to attack the black economy, keep a tag on transactions, and minimising cash transactions. A natural corollary to this was a likely hit to the real estate sector, which, for long, has been considered a refuge for unaccounted money. The trends so far suggest some postponing of deals but there is no softening of property prices in Kolkata.
Have Property Prices in KolkataÂ Come Down?
Demonetisation of this scale was never tried in a country involving such a large population, who largely depend on cash for a multitude of transactions. There is a significant amount of cash often involved in high-value real estate transactions nationwide. However, in Kolkata, the majority of transactions happen in properties with a price tag of about Rs 30-50 lakh, where there is hardly any cash transaction as most of these flats are bought with home loans from banks or home finance companies.
As the decision of demonetisation was sudden, there was huge confusion and consumers were completely at a loss to anticipate the likely impact of the policy. There were acute difficulties in business as well as personal transactions because of cash withdrawal limits from the banks.
More than 60 days after demonetisation, we can take stock of the trajectory of property prices in Kolkata.
In spite of various projections to the contrary, property prices in Kolkata have not come down. Please read why we suggested that any property price crash was extremely unlikely in Kolkata.
If you further wait for property prices to come down before you buy a flat, you are likely to be disappointed.
Can Property Prices in KolkataÂ Come Down?
The property market is mainly for the end users in Kolkata and unlike property markets in NCR, it is not flush with investorsâ€™ interest.
The property prices in KolkataÂ mostly reflect the value whereas in many markets in India, e. g. Mumbai, Bangalore, there is massive speculative interest, often funded with unaccounted money.
It was anticipated that demonetization would flush out this cash thus eliminate the speculative interest in property transactions and prices would come down.
But interestingly, this did not happen anywhere in the primary market.
The market has already absorbed the shock and property prices in Kolkata are unlikely to come down.
In Kolkata, there was no runaway speculative price rise for the last 3-4 years and hence apartment prices are rather realistic compared to other Metro cities. As there was no stiff price rise in the last few years, the chance of sudden nose dive of prices are also very slim.
Developers Already Accounted for Land and Construction Cost in Running Projects
The real estate projects under construction in Kolkata have already accounted for land purchase and construction costs. These components in the cost of flat acts as a base and the developers cannot decrease flat prices lower than these costs.
In an ongoing real estate project, there are always some early buyers. Once a developer receives booking of flats at a certain price point, it is next to impossible for him to reduce the price in future without antagonising and being unfair to early buyers.
This is one of the major reasons why the developers did not decrease property prices anytime in spite of major debt servicing obligations with many of them.
Therefore, the developers took recourse to various sales promotions to make their properties more attractive, but there was not really any base price cut.
The Rental Prices are Increasing
Because of the slowdown on property purchase, the rental prices are increasing across the country as more buyers are deciding to stay in rented flats for a longer period of time.
This is actually going to be economically imprudent as the rent outgo is considered a pure expense only and a much better idea is to pay EMIs to own an asset.
We are surely heading towards a benign interest rate regime. In fact, the first tranche of surplus liquidity induced interest rate fall has happened already. The quantum of fall was substantial and has happened in quite a few years. Â The trend is going to gather momentum in coming months.
It is financially prudent to take advantage of lower interest rates to buy a property on a rather affordable home loan than to pay higher rent.
Property Prices in KolkataÂ are More Likely to Go up than Go down
The real estate market is getting transformed with landmark regulations like the RERA, which is expected to bring enhanced confidence of buyers in the market due to superior transparency.
The compliance with the RERA is likely to actually increase property prices, although the pricing mechanism is going to be far more transparent. In fact, compliance mandate of the RERA will help well organised large developers than smaller developers.
It is also expected that there will be enhanced FDI inflow in the sector with better corporate governance and transparency. Transparent, accountable transactions will be the underlying justification for FDI inflows. Real estate would be the next big corporate investment avenue, collecting popular goodwill internationally. Such integrity and transparency in operations have been an attractive proposition for private equity funds. Private equity investments in real estate rose 40% year-on-year in the quarter to March, 2016 at Rs 3,840 crore. Of this, 48% or Rs 1,870 crore went into the residential segment.
Moreover, near absence of cash transactions is likely to increase tax incidence on property deals, and the increased tax incidence is likely to be passed on to the buyers.
All in all, the increased cost of compliance will surely increase the cost of properties in Kolkata, although it will also increase transparency at the same time.
Waiting to Buy Properties in Kolkata will be Disappointing
As the real estate projects under construction are likely to meet the governmentâ€™sÂ policy to transform the sector, it is better now to take advantage of decreased interest rate cycle to look up properties of choice in Kolkata.
The demand for homes is likely to increase in Kolkata with lower interest rate and as demand rises, property prices may inch up too.
Moreover, with decreasing Fixed Deposit rates in banks, real estate is slowly expected to become the preferred investment vehicle for individuals and corporates.
The decision to wait for property price fall and go on paying increased rent will be counterproductive to financial prudence.