In the immediate aftermath of demonetisation, prognosticators were quick to warn of a collapse in prices across the Indian property market. This idea has been reinforced to some degree by reports, accurate or not, of a dip in the interest level of potential buyers of residential properties. But a thoughtful analysis based on long-term trends, as opposed to a knee-jerk reaction based on transient circumstances, points to a different conclusion. Portending a crash may grab headlines, but the more reasonable expectation is that demonetisation will exert mild upward pressure on real estate prices.
The reasons are varied and nuanced but essentially boil down to this: When costs go up, prices go up. As will be explained below, development expenses related to land, permits, and construction will rise; therefore, it logically follows that these increased costs will be passed along to end users, in other words, the purchasers of apartments, villas and plots.
This adjustment may not take place immediately or uniformly, but it certainly will occur first in “new-economy” cities-those urban centres characterised by a swiftly growing population engaged in salaried, white-collar employment. Already, these cities are weathering the demonetisation storm relatively well. Take Bangalore, for example. With its property market driven by salaried professionals in the IT and ITES sector, the long-term trend is for buyers to carry out transactions through bank loans and cheques. According to reliable local estimates, a full 95% of transactions of properties costing less than one crore in Bangalore are completely “in the white”, not involving a single rupee in cash.