Demonetisation – Leading to Fulfilled Dreams

by Vinaya HS on December 18, 2016

in Finance

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Everyone dreams of owning a house but despite opportunities, these dreams are left unfulfilled due to lack of sufficient funds. On the 8th of November, the announcement of Demonetization bought some ray of hope for home buying aspirants.

Past Real Estate Scenario

The past few years have seen a considerable increase in prices of flats and land. This has taken place due to more demand & less supply if we speak in purely economic terms. But the reasons are beyond this. The land is being purchased in the outskirts at cheaper prices, infrastructure is developed by legal as well as other means, and later on housing projects were taken up. The prices are pre-decided and if people not ready to purchase at the pre-defined prices, they are left vacant, which is against economic rules.The above reasons and many more have given rise to the situation to wipe out the reasons behind this economic irrationality.

Rectify Economic Irrationality

In order to rectify the current economic situation, it was mandatory to take some stern steps, one of which being, declaring higher denomination currency as non-legal tender. INR 500 & INR 1000 notes have been declared as not legal tender, which means people are no longer going to accept the same, as the law has stopped to recognise them. However, no sooner than the declaration was made, did the confusion arise. People were left wondering what should be done with their current money, either to get it deposited to bank accounts or get them exchanged with bankers. The second step was to help people without bank accounts.

Benefits to Home Buyers

The economic implication of the declaring higher currency notes as non-legal ensured there was a greater inflow of money into banks. There was another restriction on withdrawals which means a reduction in the outflow. So banks have got stagnant cash. As the commercial banks have to earn profits for survival, they have to lend the same to loan seekers and earn interest. The largest loan seekers to whom banks lend are for home loans which are quite a lucrative business. As banks have to compete with each other and RBI will be reducing lending rates whenever it can, the only gap is banks passing the reduction to customers. There has been resistance by bankers because of high NPA’s but the flow should improve balance sheets of banks. Then banks have no option but to pass the benefits to the customers.

The above situation shall lead to a scenario of dropping interest rates. Further for the flats already built or under process there is a situation that they have to dispose of the flats, as there is a squeeze in the money market.

Taking a positive note of the above we can clearly understand there shall be more people applying for home loans in the near future. Further, the existing loan holders shall benefit by the drop in interest rates, which will help them by reducing the amounts they have to repay. The repayment reduction is not in terms of EMI amount but in the period of repayment. So the loans can be repaid at a faster pace. Further, this is going to help people who pay off the principal amount through excess cash if any because the repayment period shall further reduce.

In the near future, it is expected that more people will come forward and apply for home loans, thus helping them fulfil their home buying dreams.




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