Property sales are expected to take a hit by at least 20-30 per cent in 2017 due to demonetisation and a cautious buyers' approach, according to Fitch Ratings.
The real estate developers are likely to cut property prices amid weak demand, it said.
"Fitch Ratings expects property sales in India to fall by at least 20-30% in 2017, owing to disruption caused by demonetisation and general caution on the part of buyers," the agency said in a statement.
"Home-builders already have high levels of unsold inventory and are likely to cut selling prices as demand weakens."
Fitch Ratings expects risks to home-builders to rise further this year, with leverage likely to increase and liquidity to tighten.
Home-builders with access to diversified funding channels are likely to be more insulated from the downturn.
"We expect home prices to decline this year because demand for residential property has weakened significantly in the fourth quarter of 2016, following the demonetisation of large denomination notes in November last year," the statement said.
Demonetisation has made it harder for home buyers to use undeclared wealth for property payments.
The number of residential property units sold in the fourth quarter of 2016 fell by 44 per cent yoy, dragging down overall units sold in 2016 by 9 per cent, as per data compiled by Knight Frank Research. The volume of new units launched declined 61 per cent year-on-year.
"We expect the largest cuts to selling prices in the National Capital Region (NCR) followed by Mumbai, where unsold inventory is the highest at 16 and 10 quarters of sales, respectively, based on market estimates," the agency said.
The NCR is also known to have the largest cash-based economy in the country and therefore, demand is likely to suffer more from the currency demonetisation than other regions, it observed.
Fitch expects demand for homes in Chennai and Pune to be less affected by the downturn as unsold inventory is the lowest in these cities at around 6-7 quarters of sales.
"The worst of the downturn in home sales is likely to occur in first half of 2017. Demand is likely to recover moderately in the second half of 2017 as the festive season approaches, and because banks have cut interest rates on home loans by 50-60 bps over the last 12 months to multi-year lows," the agency said.
"Although property construction was hampered for a few weeks after the demonetisation announcement, we understand that most home-builders have been able to work around practical issues related to making payments to suppliers and contractors, and that construction has since resumed."