ECONOMICS

Extended Essay
TOPIC:
Impact of the government policy of
demonetization on the property market
prices, in Kompally, Hyderabad.

Candidate Session Number:

Candidate Name: K. Sourabh Reddy
Candidate Number:
School Number:
Name of the School: DRSIS, IBDP.
Name of the Supervisor: Mr. Chandrakanth Kalyan
IB Examination Session: May 2018
Number of pages:
Executive Summary: 309
Word Count:

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Acknowledgment:
To have a proper analysis of the property market prices, accurate data was required. I would like
to thank everyone who helped me in my research.

Firstly, my sincere thanks to my supervisor Mr. Chandrakanth Kalyan for guiding me

well in structuring my essay with his knowledge of economics without whose guidance
and help, it would be impossible for me to do the essay.
Also the people who have spared their time to answer my questions patiently and guided
me in concluding the essay with reasonable arguments.
I appreciate the contribution of Mr. K. Venkat Ram Reddy and Mr. Tharun Reddy for the
valuable time given for the interview.

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EXECUTIVE SUMMARY: (focus)
Hyderabad has been experiencing the growth of real estate sector in the field property ownership.
The city provides ease of access in terms of development. For example: the permissions required
from various government departments which can be obtained without much hindrance, since the
state of Telangana aimed to bring dynamic changes in the economy. The announcement of the
policy of demonetization of domestic currency denominated by Rs 500 and Rs 1000 has caused
several changes in the property prices in Kompally region, Hyderabad. Based on the market
forces of different forms of landed property, the central objective of the paper is to examine, ‘To
what extent has the Indian government policy of demonetization affected the property prices in
Kompally, Hyderabad’.

The region which is said to have the maximum demand for property and has a great deal to offer
in terms of work, education, infrastructure and entertainment is mainly observed since the time
policy was implemented with a view to bring cash less transactions in the market. Primary
sources, statistics and finding the interests of consumers and suppliers have aided in evaluating
the impact of the Policy on property pricing. Various factors impacting property prices along the
region has been examined to get a better understanding of what drives demand for property in
certain areas, especially in Kompally, Hyderabad.

Depending on the buyers’ views on the choice of the locality and the constraints of sellers in
meeting deadlines have given greater clarity on price trends and market behavior. The use of
economic terminology has also helped in arriving at better conclusions to the research. The
application of economic theory and knowledge has helped in understanding how the market
forces of demand for and supply of property determine property prices and why, in spite of the
rise the demand for property ownership is growing , property prices are not rising.

(Word count 309)

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Table of Contents: Page

1. Introduction………………………………………………………………………….. 5
2. Background…………………………………………………………………………. .6
3. Methodology………………………………………………………………………….6
4. Investigation…………………………………………………………………………..7
4.1. Study of property prices Study of property prices after implementation of the policy.7
4.1.1 Before implementation of the policy of demonetization……………………...7-10
4.1.2 After the implantation of the policy of demonetization…………………….....10-
4.2. Study of Market for Property in Kompally, Hyderabad……………………………
4.2.1 Demand for landed property………………………………………………….
4.2.2 Supply of landed property. …………………………………………………….
4.3. Study of Impact of property pricing strategies in Kompally, Hyderabad………….
4.3.1. Before demonetization policy…………………………………………………
4.3.2. After demonetization policy …………………………………………………..
5. Conclusion of the research investigation…………………………………………………
6. Evaluation………………………………………………………………………………..
7. Appendices……………………………………………………………………………….

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 1. INTRODUCTION:
One of the perennial concerns for the government of India is to control the flow of
unaccounted currency notes which in turn encourages terrorism across the borders. And also, to
eliminate the corruption which over a period of time has become chronic and so complex that it
needs to be controlled in different ways and at different levels of administration, in both public
and private sector.

Considering this viewpoint on 8th November 2016 the government of India announced the
demonetization of all 500 and 1000 bank notes of the Mahatma Gandhi Series. The principal
objective of note ban was anticipated to bring increasing number of tax payers, a bigger tax base,
increased digitalization, use of minimum cash in the transactions, the confidence of the
international business community and increased ranking in the Global market. (Ref: policy)

The city of Hyderabad is growing very fast in the retail and IT sector leading the increased
demand in the real estate market, as for most people owning a house is a dream. Kompally is one
of the top five localities like Miyapur, Manikonda, Kukutpally and Gachhibowli, It is showing a
rapid growth in the residential locality with wide network of transportation, communication
system, and is covered with proximity to IT hubs besides growth of educational institutions,
health facilities, shopping malls, banking sector, and commercial complexes ensuring a
comfortable life style for the residents to live in. The cost of housing is understood relatively
less than that of other areas in the city. (Ref 2 Map) (Ref 3 for prices of top 5 localities).

Historically it is proven that the enhancement in the realty market, in Hyderabad, has positive
influence on the property prices of both residential and commercial purposes, influenced by the
demand and supply ratio being important factor specifically in Kompally that provides an
affordable housing for people to live, but the trends in property prices have seen a hike over time
along the region to a varied extent. Hence from the above issue arises my research question ‘To
what extent has the Indian government policy of demonetization affected the property prices in
Kompally, Hyderabad’. The required data for the research is acquired easily as I keep interacting
with people while travelling in those areas.

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 2. Background:

The research is based on how the prices of residential property are affected by the introduction of
the government policy of demonetization of high currency notes. Kompally saw a significant
change in the property value compared to its neighborhood areas, which are also developing.
There is an increasing trend in the property prices before and as people believe in the profitable
investment on real estate the contemporary life style ensured by the region attracted many buyers
to buy in Kompally to have good neighborhood. It has attracted not only the local buyers but also
the business class, and the IT professionals who migrated to the city, NRI investors gaining
increasing popularity in the real estate business in recent times. This implies that the residential
property prices are affordable for majority living, especially in Kompally compared to the other
areas of the city of Hyderabad.

This research paper will take you through the analysis of this aspect with the research done on
real estate market, in Kompally region, interacting with buyers and sellers of residential property
so as to understand the trends before and after the implementation of the policy of
demonetization of high currency notes.

3. Methodology

3.1 Primary Research:

Interviewing a real estate agent and an owner of constructions taking place in Kompally.
This gives a better insight of the changes in the residential property market in Kompally,
Hyderabad.
Questionnaire approach to residents/buyers in particular areas to know their choice of
housing.

3.2 Secondary Research:

Government policy of demonetization - official website
News Papers
Real Estate Magazine
Books
And other supportive websites.

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 4. Investigation

4.1 Study of Property Prices

Table showing property prices per sq.km. (In Rs)
Locality Average price per Sqft.
Before demonetization After demonetization
1. Kompally Rs.2,675 Rs.2,225
2. Miyapur Rs.3,060 Rs.2,404
3. Manikonda Rs.2,805 Rs.2,367
4. Kukatpally Rs.3,442 Rs.2,632
5. Gachhibowli Rs.3,952 Rs.3,533

Source: Appendix: 1

A decrease in the prices of landed property in different forms for a short period of time gave a
push to the demand for property market. Further the policy of demonetization has impacted the
market with a sharp rise by 3%. The increased demand appeared not only in the residential
property but also for the all other categories of property, in fast growing Kompally region.

There are several factors that influenced the increasing demand for property, like rise in the
levels of incomes of the consumers, prices of the properties relative to other regions, pace of
growth and development of the location in the city of Hyderabad.

Why Kompally was chosen by the buyers than other regions reflect the pollution free
environment, its connectivity to different sectors like education,, health and infrastructure,
industrial growth & growing network of transport and communication at reasonable cost of
living, which is more accessible to commute specially for the middle income groups of people
engaged in their occupations to reach their workplace.

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To meet increased demand the sellers have to meet by increasing the suppliers, which is done by
shifting the use of land from agricultural and farm houses activities to residential dwellings, in
different forms, but prices varied with varied demand for land above the minimum supply price
of land, per sqft, as supply of land is perfectly inelastic in spite of being a gift of nature. This
condition of scarcity forces people to make choices in order to allocate their resources. But the
choice involves an opportunity cost which simply depends on the property prices in a free
market.

The policy of demonetization has its impact on the property prices offered by the sellers, in the
market, where the prices as signals communicated the information to decision makers, and as
incentives prices motivated the decision makers to respond to such information. However, the
effect of higher demand for land/other forms of property attracted by both buyers and sellers in
the real estate market, resulting to allocative efficiency as well as economic efficiency,
facilitating the decision makers to allocate their resources for the benefit of them as well as the of
the society as a whole.

Due to time lag between changes in market prices and the supply of properties available for sale,
the market for existing properties remained relatively inelastic. This unchanged supply, with an
upward shift in the demand for property, has resulted to a rise in the market prices slightly in
some areas, but over time one can anticipate an upward pressure on prices further, if there in a
rise the equilibrium quantity of properties purchased and sold due to fast growing demand for
commercial purposes in the same location.

When compared to the other regions of Hyderabad city, it was observed that property prices in
Kompally are considerably less, accelerating the demand for the property, in different forms. As
per the interview held with the builders, and construction owners, the demand for landed
property is high for commercial purposes than for the residential plots after demonetization
policy being announced, specifically in Kompally region.

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 Figure: (application of Role of Price mechanism as signal and incentive)

It is evident from the above figure … that as the demand for properties in Kompally region
increased there is a shift in the demand curve from D1 to D2. This created a shortage of
properties available for sale between Q2 & Q1 in short run at the initial price P1. The quantity
demanded Q2 reflect the result of shift in the demand curve to D2 which is greater than the
quantity supplied due to its constancy and construction lags. But the prices along different
regions of Kompally have slightly increased from P1 to P2 with the increased demand. These
changes in prices of properties of land/buildings along the region have signaled information to
builders /contractors and suppliers that a shortage in the market has occurred. But at the same
time, the rise in price is also an incentive for producers to increase the supply of properties.

This increase in price is also an incentive for producers to increase the quantity of residential
properties. Thus suppliers move up from point ‘A’ to point ‘C’ on D2 by starting new
constructions; at higher prices the residential property market is profitable.

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The new higher price is a signal for consumers as it signals that residential properties are now
more expensive and should actually motivate them to buy fewer properties. According to the law
of demand consumers will now move from point ‘b’ to point ‘c’ along the new demand curve D2.
But market analysts observe an increasing demand for residential properties despite a rise in
prices. This scenario violates the fundamental law of demand. However it appears to be a short
term trend, as the property price may rise further with the increased demand in long run.

It is quiet evident that demonetization policy has greatly influenced the real estate sector, which
is highly potential, even though, there is parallel economy existing with the use of unaccounted
money and heavy cash transactions carried on in the purchase of property. The impact can be
seen more on the luxury apartments commercial segments of the areas under Kompally region,
because there is very little contribution from banking sector, and other legal sources of finance,
as per the information received from the builders. Hence, the increased demand caused by the
fall in the property prices existed only for a short period of 2-3 months after the implementation
of the policy of demonetization, but in long run prices may increase to record level bringing the
real estate sector, as a strong and become capable for the sustained growth in the economy. It can
also be estimated that the Real Estate Regulations and Development Act of 2016 and Benami
transactions act might bring more transparent transaction in future with the help of the successful
implementation of demonetization policy.

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