Why property is likely to be cheaper after demonetization

Posted by Shreekant Rao on November 24th, 2016

For many city dwellers, owning a home is always a distant dream. Unaffordable real estate prices compel them to stay in rented properties instead. However, several events and trends taking shape now could soon turn that dream into a reality.

The government’s surprise move to clamp down on black money hoarders through the ban on Rs 500 and Rs 1,000 currency notes is expected to have a cooling effect on certain pockets of the residential market in the country. The housing market is a hot-bed for the indiscriminate use of black money. Many developers, resellers and homebuyers insist on having hard cash as a component of payment in real estate deals.

The recent ban on high value currency notes is expected to deal a body blow to this practice. Another likely side effect of the move is a down ward pressure on the interest rate structure. This would come as a relief to people who cannot afford the high EMIs on housing loans. In addition to these factors, many developers are also aggressively turning towards the affordable housing segment. This effectively opens up another avenue for those who find themselves priced out of the housing market in metropolitan cities.

Further, with many states likely to enforce the buyer friendly provisions of the Real Estate Regulatory Act, homebuyers can expect more transparency. This would also provide them protection from delays in construction and handover, as well as other unscrupulous practices employed by developers. In the following pages, we will outline the opportunities these developments are likely to present for homebuyers, and delve into the emergence of the affordable housing segment.

What awaits housing?

Industry experts believe that the housing market will experience a lull in the coming months, as these developments take their toll. Home buyers can expect property prices to come down in certain pockets, which would provide an opportunity for them to make their move.

Home loan rates will soften

If you have been putting off buying your dream home because you’re not ready for the high EMIs, you can expect to have more breathing room now. This is because lending housing loan interest rates are likely to come down further. Due to demonetizations, a large amount of cash in circulation will be brought within the purview of the formal banking system through low-cost current account and saving account deposits. Since this will reduce the dependence of banks on higher cost borrowings, banks are likely to slash the marginal cost of funds based lending rate (MCLR).

Fixed deposit rates have dropped across banks

Increased liquidity has brought down deposit rates, which would in turn lower lending rates.

If home loan rates are cut by 25 BPS

The surge in low-cost deposits is likely to bring down bank deposit rates and ultimately lead to a drop in lending rates as well. Here’s how a decline in home loan rates will impact borrowers.

If you have a loan of Rs 50 lakh at 9.5% for 20 Years: A 25 basis point cut will reduce the EMI by Rs 812 per month.

Rs 46,606 Old EMI at 9.5%: Rs 45,793 New EMI at 9.25%

Lenders usually leave the EMI amount unchanged and reduce the loan term when rates are cut. The extent of reduction will depend on the balance tenure of the loan. The longer the remaining tenure, the greater the impact.

[Source: http://economictimes.indiatimes.com/wealth/real-estate/why-property-is-likely-to-be-cheaper-after-demonetisation/articleshow/55511521.cms]