The Second Homes Market Post Demonetization

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Even though the Indian real estate sector was going through challenging times in past 2-3 years, H1 2016 saw a positive turn in the market. Compared to H1 2015, the period saw a 7% jump in volumes, with price corrections in the top 8 cities resulting in better sales and reduction in unsold inventory. The trend of buying second homes or vacation homes, as they are called, also saw an upswing.

Effect of Demonetization

However, demonetization affected the entire real estate sector negatively, and for a short while, all activity came almost to a standstill. Merely because of demonetization in the last two months of the calendar year, the sales volume of 2016 came down by 9% compared to 2015, making 2016 the worst year in terms of sales performance. In the last quarter of 2016, sales nosedived by as much as 44% (year on year) while new launches reduced by an unprecedented 61%.

Now, the primary sales market (or new home sales by top and grade A developers) is back to normal. In fact, the consumer traffic on all major real estate portals has returned in force to the volumes seen in pre-demonetization months of August and September’16.

To understand the impact on the second homes market, it is important to understand how does this segment of real estate sector functions.

Ashwinder Raj Singh, CEO – Residential Services, JLL India

The dynamics that drive the Second Homes market

Second homes are generally bought by people looking either for rental income or a family getaway from the crushing everyday realities of city life. With the curb on currency and extra cash vanishing from the market, the appetite for second homes has definitely reduced. Only buyers with legal sources of income and an appetite to invest through legal channels are currently interested in buying a second home. However, even these buyers are waiting for prices to go further south and the market to settle down a bit.

Union Budget Impact

As though demonetization wasn’t enough, Budget 2017 also served a severe blow to those with second home aspirations, primarily because the government has capped the tax benefits on the purchase of second homes. The maximum deduction on interest is now capped at Rs. 2 lakhs against the entire interest that was tax-free earlier, even though there is a provision to carry forward the losses in 8 consecutive financial years. Even with this carry forward facility, it will still be a loss-making venture for those trying to buy a second home with loans, because the interest on loans as well as on rental income will become taxable. The smart way out would be to check one’s investment portfolio and plan one’s finances in a manner that permits the enjoyment of benefits of a second home without burning cash or making losses.

Future scenario

It’s not all doom and gloom, however. Demonetization has resulted in price corrections not only in the primary market but also the secondary market. An estimated 10-15% price correction has already happened in this segment, and more can be expected. It is now generally felt that trends will turn positive once RERA gets implemented, interest rates come further down and the government cracks a whip on Benami property holders.

As already states, buyers have started coming back onto the primary sales market, with sales enquiries rising visibly in the past two months. An increase in supply of affordable housing is on the charts, thanks to infrastructure status now having been given to affordable housing. With prices already having come down, further corrections and more stability expected in next 6-12 months, developers are expected to offer better discounts and attractive schemes to convince fence-sitters to start investing.

For those planning to buy a second home as an income-generating asset or for capital gains currently, the market is still attractive if considered from a long-term perspective and provided they sort out their investment plans and put their finances in order. For those intending to buy a vacation home for their personal enjoyment, the market in terms of pricing advantage is eminently favourable right now and will improve even further.