Why black money is making real estate a Ponzi scheme

The trend of rising property prices due to the circulation of black money is dangerous. The fact that every transactor from a crook to a salaried professional is being sucked into dealing with black money makes real estate even more dangerous. The only way this trend can be stopped is by the income tax authorities cracking down on black money in real estate.

Now the million dollar question is "Is there political will in allowing the IT department to crack down on real estate?" If the answer is no then everyone should listen to "Hotel California" by the Eagles before entering the real estate market.

The real estate Ponzi scheme is one primary reason why real estate prices are going up while rental yields are going down . Reuters

The tax authorities will do well to scrutinise every real estate transaction taking place in the country. It is high time that the plug is pulled on the Ponzi scheme that is real estate in India.

The real estate Ponzi scheme is sucking in even normal working class professionals who otherwise in their lives would not have any contact with black money. The real estate Ponzi scheme is one primary reason why real estate prices are going up while rental yields are going down .

Real estate is the talk of the town and anyone and everyone in any place in India talks about rising real estate prices. However buying or selling real estate is a nightmare for everyone, especially salary earners.

The reason that real estate transactions are a nightmare for everyone is the cash component involved in the transactions. Obviously the first part of the nightmare starts with the dealing with the brokers, agents, builders and every other peripheral person involved in the transaction. One conversation with the real estate dealers is enough to put one off buying or selling property in India.

The trend in every part of the country is part of the real estate transaction takes place in cash. Hence a salaried professional wanting to buy a property has to cough up cash and that would mean several hundred trips to ATMs. The same applies to a person selling property, as the buyer who is invariably one who has sold a property and has got cash from sales wants to reinvest the cash.

The Indian government, to its credit, has made it more and more difficult to launder cash and that is forcing any transactor in real estate to deal more and more in real estate as there is no place to invest the black money that is prevalent in real estate dealings.

The black money floating in the real estate market is being circulated within the market and has no outlet. This black money is forcing property prices higher as one sale transaction results in demand for real estate as black money has to be deployed somewhere. This circulation of black money in a single market is driving prices higher and higher. However, at the same time, genuine demand for rentals, especially in commercial real estate, is low and that is driving down rental yields. In short the real estate market in India is flying high not on the back of demand and supply but on the back of black money having no other place to go.

The question is where will this all end? An investor wanting to book profits in real estate ends up with taking cash payment. The investor cannot exit the real estate market as he is holdings wads of cash that cannot be deployed elsewhere. Unlike markets such as equities, bonds and commodities where exit is easy and one can wait to enter, the real estate market has no exit. As the song Hotel California goes " We are just prisoners here of our own device". Once one enters the property market one can never leave it even if he or she wants to.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com, a web site for investors.

Updated Date: Dec 21, 2014 04:58 AM

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