The Indian real-estate demand will fall meaningfully as lack of currency slows down the black economy: NIPFP estimates black money is 40% of real-estate demand. Real-estate as the favoured repository of black wealth is the reason India’s rental yields are the lowest among major economies despite high interest rates.
Given its large contribution to GDP globally, falling real-estate prices have either accompanied or driven a recession. India may also see a sharp slowdown, as first slowing transactions and then falling prices affect construction. Falling prices would thus affect discretionary consumption as well as borrower health, with its own downstream implications.
Like many other effects of demonetisation, falling real-estate prices for India can help the economy over two to three years. India needs more housing stock, and its construction can boost output and create jobs: this was stalled by high clearing prices. However, for now we do not expect investors to look through the impending weakness, particularly as the slowdown in demand could be protracted by a buyers' strike. Eventually when prices have corrected by, say, 20% and mortgage rates have fallen by, say 2 percent points (implying EMIs fall by ~15%), the cost of ownership could actually be down by nearly ~35%.
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