Indian property sales slump is worst since global financial crisis

The ban on using the largest rupee notes had created waves of instability in the Indian economy, which has led to a crash in the housing market.

India’s property market will continue to suffer next year from demonetisation after sales and launches at the end of last year plunged to the worst level since the global financial crisis, incurring a 226 billion Indian rupees (Dh12.18bn) industry loss in the fourth quarter, according to a new report.

Home sales in the last quarter of 2016 in India’s major cities – including Bangalore, Mumbai and New Delhi – crashed by 40 per cent compared with the previous quarter, said the property consultancy Knight Frank. Launches of properties, meanwhile, fell by 45 per cent compared with the previous quarter. This is despite the fact that the fourth-quarter period, which is the festive season in India, is traditionally a busy time for home sales.

The plunge led to a quarterly loss of 226bn rupees.

“I think the effect of demonetisation across markets, across all segments of residential markets, has been brutal to say the least,” said Shishir Baijal, Knight Frank India’s chairman and managing director.

The crash is being attributed to the government’s surprise move in November to discontinue the use of the largest value banknotes of 1,000 and 500 rupees as a move against the country’s black economy.

Uncertainty is set to continue this year as demand is expected to be muted in the first half and there could also be some downward pressure on prices.

“The uncertainties that came in 2016 still abound,” he said. “Remonetisation is still a few quarters away. The uncertainty in the implementation of GST [the goods and service tax] still remains.”

Sales volumes could drop by up to 30 per cent and prices could fall by 7 to 12 per cent over the first six to nine months of the year as a result of demonetisation, Kotak Institutional Equities said in a report last month.

The property market in India has long been a major beneficiary of illegal funds. The move has also created uncertainty and left the population with restricted access to cash, which is prompting a lot of potential buyers to postpone their purchases.

Knight Frank had earlier been forecasting that home sales would rise by 4 per cent in the second half of 2016 compared to the same period last year.

Instead, sales in India’s biggest cities fell by 23 per cent in the second half of the year compared with the year earlier.

There was a 7 per cent rise in sales in the first half of 2016 compared with the first half of 2015.

There were a number of positive factors for the real estate industry last year after a few difficult years for the sector, including the passage of a real estate regulation bill and an improvement in the monsoon rains. Demonetisation derailed everything.

The report, which tracks eight major cities in India, said Delhi NCR was the hardest hit, followed by Bangalore and Mumbai, while Hyderabad was the least affected.

Brexit and the US president-elect’s policies could also have implications for the commercial sector in particular and the industry is waiting to see how those factors play out, said Mr Baijal. Interest rates also have the potential to play a significant role in reviving the industry this year, he said.

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