What are the effects of demonitization of 500 and 1000 rupees notes on real estate sector?

The demonetization of Rs. 500 and Rs. 1000 notes in India, announced on November 8, 2016, had significant and multifaceted effects on the real estate sector, both in the short and long terms.

Short-Term Effects

1. Decline in Property Prices and Sales:

   • The sudden withdrawal of high-value currency notes led to a temporary decline in property prices, particularly in the luxury and high-end segments, as these relied heavily on cash transactions35.
   • There was a significant drop in sales due to the lack of liquidity and the uncertainty among buyers, who adopted a wait-and-watch approach35.

2. Impact on Cash Transactions:

   • The secondary market, which involved more cash-intensive transactions, was highly affected. Sales in this segment were curtailed significantly due to the reduction in cash availability5.

3. Slowdown in Market Activity:

   • The demonetization led to a slowdown in the real estate market, with a decrease in new property launches. In the first three quarters of 2017, the supply of new housing units in major cities was down by around 60% compared to the same period in 20165.

4. Delivery of Ongoing Projects:

   • The delivery of ongoing projects was affected because payments to contractors and labor were often made in cash. The transition to formal payment methods took time4.

Long-Term Effects

1. Increased Transparency and Governance:

   • The demonetization, coupled with other policy changes like the Real Estate (Regulation and Development) Act (RERA) and the Goods and Services Tax (GST), led to increased transparency and corporate governance in the real estate sector. This resulted in a more structured and professional market235.

2. Reduction in Black Money Transactions:

   • The use of black money or unaccounted cash in real estate transactions reduced significantly, by at least 75-80%, as the gap between state-notified circle rates and market values narrowed5.

3. Shift to End-User Driven Market:

   • The market shifted from speculative buying and selling to being driven by end-users. This change made the housing market more resilient and driven by actual demand rather than the desire to launder black money5.

4. Growth in Affordable Housing:

   • The focus on affordable housing and the implementation of policies like RERA and GST boosted the growth of this segment. Affordable housing projects saw a relatively lesser impact from demonetization and continued to be in high demand23.

5. Consolidation and Professionalization:

   • The long-term impact of demonetization, along with other reforms, led to the consolidation of the market, with credible and long-standing players gaining prominence. This resulted in a market where brand, product, and project completion timelines became key determinants of success25.

In summary, while the short-term effects of demonetization were challenging for the real estate sector, the long-term outcomes have been largely positive, leading to increased transparency, reduced black money transactions, and a more professional and structured market.