Demonetisation impact on real estate worse than 2008 Lehman crisis?
India announced a ban on Rs 500 and Rs 1000 notes almost eight years and two months after the Lehman Brothers decided to file for financial bankruptcy, impacting economies around the globe. The worst hit sector then, like now, was the property market. Like today, both sales and launches of residential units were impacted. But was the Lehman crisis the worst that the property market had experienced or is demonetisation more painful?
Before the Lehman bomb dropped, India was enjoying 300% growth in residential prices in India, commercial rentals were getting expensive by the week and new development projects were being launched every other day. Developers were in a mad rush to consolidate and control land. Even until October, the defiance in the sector in India was apparent, it had disregarded all global macro-economic signals of the impending disaster.
Things started going downhill after November 2008 – implicit discounts and free cars given away with properties during Diwali failed to revive the market, leaving stakeholders in the real estate sector wondering how long the market would take to bottom out. The luxury end suffered and developers were forced to cut prices and focus on end users rather than investors. The sub-prime mess saw home prices fall by almost 25% in certain markets, sales activity slowed down by almost 30%, distress sales were common and housing loans shot up from 7% to 12%. Job cuts in the market and defaults on loan repayments increased. Confidence levels dropped and house purchase plans were put on the backburner. The suffering had begun.
To tide over the crisis, some developers started looking at affordable housing and soon others too joined the bandwagon. A slew of affordable housing launches across the country led to higher absorption month on month. Nearly 39,000 out of 48,500 residential units launched during the months that followed across the top metros were priced below Rs 3,000 per sq ft. The average size of the housing units launched in the period also shrank by 15% to 30% across cities when compared to similar priced units launched in early 2008. In Delhi NCR, the size of 2 BHK units became smaller by 14% (to 1,080 sqft), while 1 and 3BHK flats shrank by 5% and 12% (to 720 and 1,493 sq ft) respectively, a report by the then consultancy DTZ (now merged with Cushman & Wakefield) had said.
Every aspect seems familiar, no different from what the realty market is experiencing today. According to data made available by Knight Frank India, the year 2008 saw sales volumes going down by -27%, indicating negative growth. The year 2016 has also projected negative growth of -9%. In the fourth quarter, after demonetisation, sales volumes have dropped by 44% and new launches have fallen by a massive 61% year-on-year during the same period. Had it not been for demonetisation, property markets would have actually fared much better.
“The fall in sales volumes and new launches has been so severe during the last quarter of 2016, that it has brought down the entire second half of 2016 numbers down by 23% and 46% respectively compared the second half of 2015,” says a report by Knight Frank India titled India Real Estate.
“The residential markets of the top eight cities in India had started off on a positive note in 2016 with the first half of the year witnessing a 7% jump in sales volumes. The third quarter sales volumes also showed positive growth on the back of the start of the festive season.
The overall positivity was due to a host of factors such as regulatory environment, approval of the GST bill and amendments to REITS,” says Rajeev Bairathi, executive director and head capital markets, Knight Frank India.
The demonetisation announcement on November 8, 2016 played spoilsport.