DEMONETIZATION – Impact on Real Estate and Home Loan

Demonetization in layman’s language refers to the operation of removing a currency unit of its place and losing its eminence as legal tender for exchange. Since when the Prime Minister of India Mr. Narendra Modi, declared demonetization in India, the country has been divided into two. One supports the verdict and proclaims this as a significant move to control corruption and the other believes it to be a choice to make things worse for the ordinary section.

Demonetization & Real Estate

Let’s see what consequence the demonetization drive has on the real estate market:

Banks to cut Interest rates of loans:

Less money to diffuse in the economy led to higher interest loans. Given that the banks now have a huge deposit base with so much money flowing into the bank accounts of people; it can definitely let people borrow money at a lower interest rate. Furthermore, property buying will be within reach of everybody with loan-friendly policies of the government. There is no denying the fact that as liquidity in banks get better, banks will be bound to lend aggressively. To make that successful, they will have to lessen interest rates.

Luxury segment will be expected to hit the most:

Research says that as premium luxury segment housing transactions mainly take place in cash, this section will be most hit by the pronouncement of demonetization. A market research declares that the section has already experienced around 30% fall in booking since the decision has been rolled out by the government.

Better transparency:

The demonetization drive is an image immunisation for the real estate sector. The process will make the segment come out of the image of a biased sector inducing more people to buy homes and properties of their preference.

Affordable section not under scrutiny:

The experts of the sectors state that the affordable and mid section will stay unaffected by this decision. Most buyers in affordable section go through the banking procedure to finance their residential or commercial possessions.

Boon to organized builders:

The verdict is a bonus for organized buyers and genuine buyers. The demonetization drive will do good for those developers who believe in practicing fair dealings and do not deal in black money cash/transactions.

Demonetization and Home Loan Rate

Let’s discuss on how demonetization will influence Home loan rates

The organized banking system will have a huge deposit base. This means a huge amount of cash will be in circulation. As this will lessen the dependence of banks on higher cost borrowings, they are likely to cut the marginal cost of funds based lending rate (MCLR). This will speed up the fall in home loan interest rates.

As per market study, the banks have already started slashing down the interest rates on home loans. The huge inflow of low cost deposits will get the bank deposit rates down and show the way to a drop in lending rates as well. Let’s discuss about the impact of 25 basis point cut on the borrowers:

Say, you have a loan of Rs 50 lakh at 9.5% for 20 Years: A 25 basis point cut will lessen the EMI (Equated Monthly Instalment) by Rs 812 per month.

Previous EMI @ 9.5% is Rs 46,606: New EMI @ 9.25% becomes Rs 45,793 tenure when rates are cut. The level of decrease will depend on the remaining tenure of the loan. The longer the outstanding tenure, the greater is the impact.

Wrapping up:

It is now obvious that in the long run, only players who keep in honest transactions will carry on. The end users will directly benefit from all these decisions, as they will be conscious of their rights, have the guarantee of not being cheated by builders. People will now have the option to buy properties of their choice at reasonable prices, in projects which will surely be delivered on time. It is assumed that the Indian real estate sector will emerge healthier, stronger, and capable of extended time frame of sustained growth. The demonetization drive was undeniably a much required move for this sector to give a clear image to this black money ailing sector. The real estate builders and the buyers both are waiting for some more restructuring in this segment to make this sector more organized.