Economist R Nagaraj Debunks Myths About The Effect of Demonetisation on the Real-Estate Sector

12 December 2016
Courtesy R Nagaraj
Courtesy R Nagaraj

On 8 November 2016, Prime Minister Narendra Modi made an announcement declaring that notes of Rs 500 and Rs 1,000 would not be legal tender as a part of his government’s policy to clamp down on counterfeiting and black money. It has been widely reported that this policy would directly impact the real-estate sector, which typically witnesses a significant amount of transactions that are made through cash to avoid taxes. The Economic Times also reported that demonetisation would lead to a reduction of interest rates on housing loans, and consequently, to an increase in investment in the sector in the long-run.

R Nagaraj, an economist and currently a professor at the Indira Gandhi Institute of Development Research in Mumbai, is sceptical about long-term effects of the policy on the sector and its effect on interest rates. Nagaraj is a macroeconomic analyst who has studied the impact of black money on real estate. He has also been a guest professor at the Indian Institute of Management Calcutta and the Woodrow Wilson School at Princeton University. On 6 December, Kedar Nagarajan, a web reporter at The Caravan, spoke to Nagaraj—over email and a conversation on the phone—about the impact that demonetisation would have on the real-estate and housing industry.

Kedar Nagarajan: What short-term and long-term impacts will demonetisation have on the real-estate and housing sector?

R Nagaraj: As is widely accepted, black money plays a major role in real estate. In metropolitan areas, the ratio of black money to white money payment for residential housing is said to be 30-70. In smaller cities, the proportion of black money is said to be more. If a buyer wants to pay entirely in white money—by cheque payment—then the asset value gets revised up by 10–15 percent—a measure of the premium on black money.

Large and reputed builders have built a structure of multilayered legal contracts to protect themselves, and their brands, from the taint of black money. Probably, smaller and less credible builders—who operate more on contacts than on legal contracts—would deal with black money more directly and hence are likely to get affected by demonetisation.

Kedar Nagarajan is a web reporter at The Caravan.

Keywords: economy real-estate finance Cash demonetisation black money Housing