Demonetisation May Not Cause Drop-Down In Property Price. Know Why –

With huge expectations from demonetisation loosening the surging prices in property segment, here is a new theory which actually turned the anticipations upside down. As the recent impacts of demonetisation on properties’ price, it was anticipated that there would be a fall in the demand of property while the supply will remain constant. Considering the demand-supply theory, as the gap shall get widen keeping supply on higher side, the prices of the property was expected to fall.

Unfortunately, the Cost theory was not taken into consideration by then and with recent demonetization the cost of property is expected to increase. It is an outcome of increased taxes and development cost pertaining to constructions and permit. And when the cost rises, it definitely affects the prices, leading its upward movement.

Factors that constitute the cost of a property and their relevant impact on the property are as follows:
1. Cost of Land: Prior to demonetisation, the land-owners tend to escape the tax liabilities with the cover of unaccounted cash transactions. However demonetisation has brought a transparency involving money-transactions thus, leading to increase in tax payments for land owners. As a result, the cost of land gets inflated and the entire burden is transferred to the end user, Now the landowner will definitely seek more prices for the property than before covering the inflated cost of property.

• This impact shall largely be observed in case of plotted developments where land constitutes a major part of the cost of development. However in case of apartments, as there are large number of units hence the inflated cost of land is segregated among these units thus generating a minimal impact of increased cost.

• With the enforcement of laws curbing ‘Benami transactions’, the buyer shall be liable to pay taxes with every real estate transaction thus ultimately adding to the cost of land. Earlier such tax liabilities were evaded, now the possibilities have been narrowed down with a view of bringing more clarity for the ownership of properties through ‘Benami Transaction Act-2016’.

• With the digitalization, a correction shall be observed while registration of the property transactions in context to its circle rates. Initially, the properties were registered at the much lower prices compared to the actual deal price thus attracting lower taxes and the major payment was executed in cash thus remained unaccounted. But now as the cash inflows have been majorly restricted and the cheque payment and online transactions have turned out to be the major source of payments, thus buyers need pay taxes either prevailing circle rates or actual deal price ultimately paying off higher taxes and thus inflating the cost of property.

2. Construction Cost: Construction cost includes the payment to material providers, sub-contractors and labourers. The mode of payment to all of these is via cash while with demonetisation, the flow of the cash in economy has been regulated while the payments. Thus the construction norms have been largely impacted resulting into adjustments in construction practices. So ultimately, it will result in inflating the construction cost depending upon the extent of adjustments.

As all the payments shall be regulated through banks, the price of raw material shall go up, wiping off unaccounted cash payments and ultimately attracting more direct and indirect taxes. With the implementation of proposed Goods and Services Tax (GST), on the other side, the burden of tax shall get reduced lowering the costing component by removing tax barriers even between the states.

Nevertheless, it is worth noticing that these impacts shall not occur uniformly and immediately as well. According to the recent survey, Delhi-NCR estate will also be affected in the wake of demonetisation. The major factor contributing to it is the presence of while-collared salaried employees who actually carry out their property transactions via cheques and bank loans.

The geographical characteristics of property also have the huge impact on its cost inflation. Metros like Delhi and Mumbai, where the property prices are soaring high and most of the transactions are being carried out via cash thus remained unaccounted due to the higher difference between ‘actual’ prices and circle rates of the property, would largely get impacted in term of ‘property cost inflation.’