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Black Money Cushioning Real Estate

Swaminathan writes:

But Indian borrowers do not walk away from their homes — and loans — if prices dip. This is because a large proportion, often half, of almost all home purchases is paid in black money. If a house is sold for Rs 100 lakh, the official registered value will typically be only Rs 50 lakh, with the balance paid under the table in cash.

A bank may loan Rs 50 lakh, covering the entire formal price. However, the owner’s contribution is not zero: he has paid Rs 50 lakh in black. To preserve that black investment, he will keep paying his installments even if house prices dip.

The reason is that banks enjoy, without asking for it, a huge safety margin provided by the black money invested by every home owner. To preserve this black investment, borrowers will do their level best not to default and lose their property. Ironically, black money enforces loan discipline in India, far more effectively than formal contracts or legal processes.

This very black money also acts as a cushion for price falls. What seems to be happening (entirely hearsay) is that as home prices come down in India, sellers are looking for a lower “black” component. The “white” part – the actual registered value of the house – remains the same. Two good things come out of it.

One, lowering the black component requires less hoarding, saving etc. Black money needs to be hidden from the government for obvious reasons, so it tends to be in rupee bills. Hiding bills in your mattress etc. is of little use, because there is a fear that someone else may rob you. So people have done things like take a loan on insurance policies paid in cash, bought dollars in cash etc. – but the government has plugged most, if not all, of these loopholes through PAN requirements or KYC norms. The other options are buying gold or to put cash in bank lockers, which isn’t very helpful either, because gold has a huge price (which can be higher than paying the tax!). Even storage is seemingly safe locations has risks, as noted by a man whose money was eaten by termites. (Hat Tip: Madhu Menon) Heck, even the Sheikh of Abu Dhabi had his money eaten by rats. (From a conversation with Nitin Pai)

He refused to accept checks from the oil companies, at first kept his cash under his bed. When the bedsprings began to bulge, he had the cash carted to a palace dungeon. It was only after rats began nibbling at the treasure chests and insects started eating the folding money that Shakhbut reluctantly agreed to accept the principle of banking.

Two, the registrars and the income tax department are unlikely to probe further. A reduction in the “white” component necessitates a lower registration value, which can be construed by the registrar or the IT department (to which the registrar must file all registrations above Rs. 30 lakh in value) as a ploy to avoid paying income tax or stamp duty. A subsequent probe might unveil any black money, on which there is the liability of a huge penalty, tax and all sorts of criminal charges.

The by-product of the reduction of the “black” component is affordability. If you liked a house and it listed at Rs. 75 lakh, of which you could put up 15 and get the remaining 60 lakhs as a loan, you would be tempted to buy the property. But if the seller demanded half the money in cash, you would need 37.5 lakhs in cash, and then a further down payment of say Rs. 7.5 lakhs for the registered value of the house, and then a loan of 30 lakhs.

That means you needed to have 45 lakhs to buy a 75 lakh house, a 60%+ down payment which is very unsustainable. The IT/BPO managers, the highly salaried employees of large organisations get all their money in “white” – meaning, all taxes are prepaid. They may qualify for higher loans, but putting in 60% down is simply beyond reach. As the black component comes down, more such people can afford real estate and therefore there is an intermediate cushion.

Is then my view that the real estate bust is over? Hardly. We still have way too much supply compared to demand, even if this black component goes to zero. (which it has, when you buy from most established builders today) There is little, if any real estate available for the lower-middle class, and there lies the largest demand. Real estate companies would rather hoard land than give in to lower middle class development; not just because of lower margins (must sell more flats for the same overall area and less price per flat). It also is a community thing – build one such tenement and you will find the entire area branded as such and therefore no high margin “luxury” development can happen there. Local developers will stoop to any levels to prevent that happening.

This is stupid, apart from being unfair. There is way too much luxury supply so anything new in that level makes things even more unprofitable. And if you have an area with only luxury apartments, where do the staff live? (Most Indian “luxury” households have an entourage of personal staff, from chauffeurs to maids to baby-sitters to odd-job-errand-runners).

I hope this brings to builders some sense that lower income housing is as important and the lower margin creates wealth in the long term. Plus, we don’t want to see some people left behind, do we – speaking politically, that is a nightmare you don’t want. When the lower income people – the real voters if you may – feel left behind only one thing happens. Increased regulation and cost across the board, which makes sure EVERYONE is left behind. Suffering is a great leveller.

  • Rohit Chauhan says:


    sorry for long comment –

    I dont think all real estate companies build only luxury housing out of sheer greed or to cheat the common man (although i dont discount that there would be many such companies that do)

    I think one of the reasons for higher price housing has been the high demand and if a business man can sell for higher margins (doesnt matter if it is soap, house or a car), why will he bother for low margin product.

    In addition i think there a lot of hidden costs in housing – corruption, unclear land title, legal and regulatory hassles. So for any real estate company there are a lot of risks too. If they get into low cost housing they may not have the cushion to absorb such unexpected costs.

    i think the blame for the absence of low cost housing lies more with the government and their pig headed policies like urban land cieling act, a hodge podge of stupid regulations , unclear land titles etc, lack of infrastructure – due to which you cannot buy land cheap away from a city and develop low cost housing.

    If they fix that will find businessmen developing low cost housing …

    case in point – look at telecom and airlines. create the correct the right environment and you can see great result

    personally i think black money and lack of low cost housing is really a symptom of bad policies than greed alone


  • Deepak Shenoy says:

    >Rohit, no problem and glad to hear from you.

    Policies aren’t really bad – if you look at LIG and MIG housing in pretty much most cities, restrictions have been relaxed and titles acquired in order to provide developers with incentive. Developers in fact have hoarded this land and not quite developed it, which is why governments are not as keen as they should be. The rules have been foul, but getting better- ULCRA has been repealed practically everywhere now.

    Developers hoard land on the outskirts – typically to keep prices high, by cutting demand.

    Actually telecom and airlines are the exact examples of greed. The Jet and Airtels of our world literally bled the consumer dry until the Reliances and the Air Deccans turned up. What we need is some one like that to rock the real estate world. But the point is: the opening up of the sector only made people like Airtel and Jet greedy hogs and they complained like crazy when the cheaper mass competitors came up. It took competition to destroy the rigged pricing – and it will take that, and not government opening up, for more lower and middle income real estate. That’s why I would rather appeal to developers – to see the light before the reliance or air deccan of their sectors takes them out.

    I think you can go fully legit in housing, but people choose not to. Government policy is in the right direction – come another 10 years and we will probably not have quite as much black in there.

  • Raag Vamdatt says:

    >Hi Deepak,

    Interesting article – you brought about a totally different perspective about black money in Indian real estate!

    It is so true – by paying in cash, we do end up paying a lot more than the stated 15% margin money!

    And where would salaried people bring this cash from?

    No wonder, as you pointed out, most reputed builders today accept 100% cheque payment.

    Also, the property registers that maintain the value of properties in different areas of a city (for stamp duty purposes) are also being updated by the government to reflect the actual prevailing rates. This is also leading to more white component being reported in house values!

  • Sajal says:


    Your blog is really good. Keep up the insightful posts!

    You wrote: We still have way too much supply compared to demand.

    What are your sources for real estate reports/news in India?

    Thanks in advance!

  • Deepak Shenoy says:

    >Sajal: Thanks! I typically only use public news and whatever I gather from my personal findings. (I’m in navi mumbai) The supply demand story has been around for a few months in the papers now. My personal findings are that there is oversupply in gurgaon , Mumbai (navi and suburbs) and in Bangalore. Largely through contacts who own, buy, sell or broker the business.

  • Gowri says:

    >What you say about black money coming down might be true in primary real estate market, where the sellers are builders. But in the secondary market I think you will find it hard to sell or buy without dealing with black money. In many cases the sellers dont want to pay as much regn charges so they force the buyer to accept black. Since the sellers are mostly individuals they dont have the clout of a builder to say no and still keep the same price.

  • Deepak Shenoy says:

    >gowri: check out Supposedly do only all white deals and allow people to list their properties too (but they charge a 0.5% commission – not sure if it’s worth it but at least there is somthing)

    Plus you can see a number of NRIs selling, which almost always means they are ok with all white.

    But yes I agree life is a little more difficult for an individual for both asking for and giving no black.

  • Realty Rider says:

    >Much of the black money is hidden in the real-estate transactions with a boom in the housing sector and banks only too willing to offer loan at low rates. The sale price declared is mostly lower than that actually paid for. It should not be difficult for the tax authorities to scrutinise the source of funds and the bank accounts in every deal. Black money is not all that evil.Black money has its blessings too. Much of the investments in real estate would not have been possible without the informal sector participating in a big way. The hidden or informal economy operates alongside or underneath the visible formal economy and it is for this reason that it is also referred to as the parallel economy. It is not always the case that every economic activity in the informal sector results in tax evasion. Black economy is not wholly a curse. The problem with the parallel economy is that it upsets national income statistics because of the failure of persons operating in the underworld to report their incomes.For more view-

  • Anonymous says:

    >superb insight… thanks so much.