Many of us have been disturbed with demonetization of Rs. 500 and Rs. 1000 currency notes. People on social media have mentioned how the step hurts only the common men especially the poor people but not the folks who have evaded their income taxes and hidden their money in real estate sector.
Well, now the question is –
“Does the demonetization of these high-valued currency notes really upset the black money buried in the real estate sector for good?”
The majority of the transaction in real estate happens via currency notes. Only 20% of the money is transferred in white through cheque, loans from a bank or online transaction while the rest 80% is transacted black through cash.
This is the reason why demonetization of Rs 500 and Rs 1000 bank notes along with the limited circulation of new 500 and 2000 rupee notes affects the forthcoming dealings in the entire real estate industry because now nobody can deal in the manner like they did earlier.
So now that the buying movement crumbles down, the cost of the flat/property goes down automatically. After all, the market runs entirely on the demand & supply ratio as there is no index value in real estate like we have for stocks, currency and precious metals like gold and silver.
This means if a builder XYZ purchases a land and constructs a building on it and nobody buys the flat, then the price of the flat is technically zero unlike gold and stocks where you can sell in the market based on the current index value. The owner here can only sell his flat/property/land if there is a demand.
However, if the flat is sold out at a price of Rs.1,200 per sq.ft and there are 50 buyers and the person who made the original layout is out of the picture, then as discussed above 20% of the money will be paid in white and the rest 80% in black. The ban on Rs 500 and Rs 1000 currency notes rightly hits this layout and crumbles the 20:80 ratio of the trade.
Scene 1 in the Real Estate Market
Now let us assume that all the flats have been sold out and a new buyer wants to buy this flat from the existing owner. Now since there is a demand, there will be a slight appreciation in the rate, let’s assume 1,300 per sq.ft which the new owner is ready to pay. Now if one or two flats sell at the same rate, Rs. 1,300 per sq. ft will become the benchmark price.
Now consider the new situation i.e. the current one – PM Narendra Modi announces demonetization of Rs 500 and Rs 1000 currency notes. Now, since 80% of the cash dealings in real estate sector are in the form of these high-valued notes, the demand for these flats will automatically go down as it is difficult for the new buyers to transact the amount in cash.
Now that most of the real estate buyers buy flats/land/property with their black money, the demand for real estate straightaway goes down. No wonder, there is less competition for the same flat as there was earlier. The supply is still the same but the demand has reduced drastically.
Scene 2 in the Real Estate Market
Now let us assume a new buyer wants to buy the same flat. Being a tax payer he can only afford to purchase the flat in white. Next, he is ready to pay Rs. 600 per sq.ft. of the flat.
Now if the seller is in high need of money and the new buyer is the highest bidder (in terms of white money) and people who used to pay in black money do not come forward to purchase the same flat, then the flat will be sold at the rate of Rs. 600 per sq.ft.
And once a deal happens like this, all the flat’s price in that building/society will get benchmarked at the same price. So, suddenly for other buyers who had purchased the flats with 80% black money, their investment would reduce by flat 50% or perhaps even more.
Needless to say, the capital in the real estate sector is always held as a ‘superficial value’ – hoping that buyers will always purchase the property at a higher price in the future.
However, now that the so-called superficial buyers disappear, the capital and wealth also disappear. One, two dealings at a lower price and the price of the entire locality goes down.
Yes, in the coming 1 year, people with estate who are assuming that their properties are worth crores will suddenly have to face the bitter truth that now their land/properties/flats are only 30-40% of what their price used to be. The wealth disappears by more than 60% as the demand goes down.
This is how all the black money buried in the real estate sector will then be corrected. In addition, the wealth will then be transferred to tax paying citizens who will buy the same property at low prices. Finally, beating the people who ruled real estate through their black money or should I say cheap money. Yes, in terms of money both will now stand at the same level. No more flying high with those black money aka cheap money.
The value of the money increases if it is moving. With the restriction of black money, the value of white money increases automatically as it moves easily. This is how demonetization of Rs 500 and Rs 1000 currency notes help in tackling the black money racket in the real estate sector.
Needless to say, banning such high-valued notes have hit the real estate sector the most and so finally people with white money can now heave a sigh of relief as they can proudly buy their dream house without worrying much.