Demonetization will not devalue properties in Bangalore
The general consensus is that the real estate prices will correct themselves owing to the death of black money. But will that actually happen in Bangalore?
How is black money involved in Indian real estate?
0–50% of the transactions are done in cash
The municipality guidance value/property rates are much lower than the actual sale price. So, if you are buying a property of 80 lakhs, you may be doing a registry for just 40 lakhs so that you can save on the stamp duties and registration charges. The remaining 40 lakhs is typically paid in cash, enabling consumer black economy.
For Bangalore, this figure is close to zero. Details below.
Investments in builder projects
Bulk or business black economy is boosted by huge back door investments in realty projects — similar to us buying groceries without receipt. The money invested is kept off the records and in return, apartments are written off in dirt cheap “on record” prices.
This kind of involvement has no direct relationship to the apartment prices though. The prices are mostly driven by the demand, which is bolstered by 1, i.e. the consumer black money.
De-monetization effect
Once the black economy is restricted, this 0–50% of the cash transactions (above and beyond the registration value) will definitely decrease. The new houses are quoting random figures, which may not be correct, but a decrease will be there, in general.
The key factor here is the guidance value. The price correction is all about the money that is being paid in cash during a sale transaction.
What will happen in Bangalore
Bangalore (the city area), will largely remain unaffected.
Factor 1
We have been involved in quite a few transactions in Bangalore, and we can tell you for a fact that the cash part in a sale transaction in main Bangalore, on an average is just 4%.
Let’s churn some data,
So you can see how close the guidance value is to the actual quote price of the sellers. In cases, it even is lesser than what people are willing to sell at.
Factor 2
Another factor to be taken into account is the cost price for the sellers. A seller who invested in a property post 2012 has hardly gained anything today. We have had clients selling for a profit of less than 1% year-on-year. So from the buyer’s perspective if someone hopes for the prices to fall by 10%, when the current quote of the seller is hardly 8–10% over his original investment, hopes will remain hopes!
Factor 3
Many banks provide loans on 80% of the Sale Deed Value (Registration) and not the actual Sale Value. Due to which, many buyers in the metros go for the full amount registration and hence avoid any cash transactions.
The Truth
If you want a property for investment purposes, do wait.
Look for newly developed/under-development areas in the outskirts where the guidance value is much lesser than the market value. Price corrections will happen, and 6 months down the line you will be able to afford a much better property than today.
But if you are looking to settle, do it today.
These prices will not decrease. They will follow their normal growth trajectory of 2–5%, and even more if the BBMP focuses on its whims. The 20–25% guidance price increase this year in April was focused on more taxation [source], and the same may happen again next year.
More truth
People are afraid. Sellers are ready to sell their properties at a price lower than they were willing to yesterday. But tomorrow, once people see that the prices are not decreasing, they will regain confidence. Today is the day. Carpe diem!
Addendum:
People have started analysing these trends more. See:
http://timesofindia.indiatimes.com/city/thane/Price-correction-in-realty-market-not-a-possibility/articleshow/55532361.cms
