Thursday, May 26, 2011

Cash in Indian real estate

Cash, 'black' money, No. 2, or 'kacchha paisa', has always paid a huge role in Indian real estate. Few deals, except in the new condiminiums, take place without a substantial payment of money that goes unrecorded, both in bank accounts, as well as in the registration fees that are calculated as percentage of the consideration amount declared.

When a seller insists that he be paid entirely with bankable funds, the number of potential counterparts is typically very small, and the consideration usually lower than the going market price. 

Over the last few months, I have been getting the sense from several people that the percentage of cash in Delhi property deal has been going up: in Punjabi Bagh, a property worth 25 cr. is officially transacted at Rs. 4 to 5 cr.; at the southern end of the Chattarpur area, in Mandi village, 2 1/2 acres of farmland are worth Rs. 14 cr. Only 3-4 cr. are being paid by cheque.

If indeed the proportions have changed, then it is worth trying to understand what has happened. My initial conjecture is that only hot money is chasing property now, money looking for a place to park itself. Legit money is drying up, as interest rates rise, and property prices have reached unaffordable levels.

If this conjecture is right, the property market should correct substantially, as the ratios become absurd. The seller who is not looking to invest the money in another property does not know what to do with huge suitcases full of cash, or indeed where to safely park it.

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