A significant reduction in black money in the economy following the government’s decision to withdraw old higher denomination currency notes may have a substantial impact on the real estate sector as the move can reduce the number of unaccounted transactions in the secondary market to a great extent. But that comes as good news for homebuyers as a decline in such transactions in the sector will lead to price rationalisation.
Add to this, a softening inflation and cut in deposit rates by banks over the last few days only hints towards a reduction in repo rate by the Reserve Bank of India in its forthcoming monetary policy review. Also, probability of a cut in home loan rates by the banks and housing finance companies is also quite high.
While there are broad expectations that RBI will go for a 25 basis point cut in repo rate in December on the back of softening CPI inflation, some say that it can go for a 50 basis points cut too on the back of latest government action. “The demonetisation measure will lower aggregate demand in the short term as the economy adjusts to the short-term pains in transactions. Further downside to growth as a result of slowdown in real estate and related sectors, retail trade, and some consumer durables cannot be ruled out. This will likely prompt the RBI to support the economy through possibly front-loaded additional rate cuts. This supports the probability of a 50 bps rate cut in December,” said a report released by Kotak Institutional Equities on Wednesday.
Hopes of fall in prices
Soon after the government’s announcement to withdraw old notes, Deepak Parekh, chairman, HDFC Limited said that he expects the price of real estate to come down in the medium term. The fall, if comes, will be on the back of an already weak real estate market which has failed to take-off over the last two to three years and the industry is saddled with high unsold inventories across all major cities. A report released by Religare Capital Markets on Thursday estimated that property prices across the country could fall anywhere between 10-20 per cent.
Shishir Baijal, chairman and MD, Knight Frank, said that while the broader impact in the long term will be positive, there will be serious repercussions in the near future. “There will be a substantial downward pressure on the volume, number of transactions and prices in both residential and land markets,” said Baijal. He further said that impact will be more widespread and the tier-II and tier-III markets will take a larger hit.
Even a Fitch report released last week pointed towards an expected fall in residential property prices and in sales. It said that India has a big cash-based economy as a result of which there is considerable undeclared income in circulation. “The government’s move is likely to severely curtail the use of any undeclared income which is usually retained in the form of cash or invested in property and gold,” said the Fitch report adding that the negative impact will be more pronounced on sales of higher-end, premium property rather than entry-level housing as they are purchased by first-time homebuyers.
There is a general sense within the industry that a decline in prices on account of this move along with legislations such as Real Estate Regulatory Act, GST Bill and Benami Act, will further increase transparency in the sector resulting into higher volumes of FDI at competitive rates.
The benefits of rate cut
While the lending rates have already come down by around 100 basis points over the last 20 months on account of 175 basis point cut in repo rate by the RBI since January 2015, the hopes of more rate cuts have only gone up following the softening in CPI inflation numbers and on account of the increased inflow of deposits to banks following the government’s latest move to “flush” black money from the economy.
The Kotak Institutional report points that the inflation pressure is likely to ease in the second half of the current fiscal. “The favorable base effect and mean reversion of the seasonal pressure on food prices will likely keep the 2HFY17 average inflation benign at around 4.1 per cent,” the report pointed. This should provide RBI with the comfort to cut rates going forward.
On the other hand, banks have witnessed a significant jump in deposits and that should enable them to pass on RBI’s rate cut benefit to customers. A statement issued by SBI on Friday said that the bank received total cash deposits of Rs 1,26,853 crore between November 10 and November 17 and the withdrawals in the same period amounted to Rs 23,337 crore. This sharp jump in deposits, bankers say, is set to bring down their cost of deposits and will improve their ability to reduce rates.
SBI chairman Arundhati Bhattacharya has reportedly said that as a result of the rise in deposits, all interest rates will fall soon.
The Religare report also pointed towards increased competition and fall in rates. “Competition from banks would intensify as deposits currently being funneled into the banking system could support aggressive rate cuts on home loans.”
While the home loan interest rates are already down by around 100 basis points and are at around 9.15 per cent, another 25-50 basis points cut in lending rates would bring the home loan rates to anywhere between 8.65 and 8.9 per cent. This will not only result in reducing the interest cost for a new homebuyer, but will also bring down the EMI burden on the existing customer and thus augurs well for prospective home buyers in the affordable and middle segment of housing market.