Rise in cost of construction pushing up prices of homes in India!

Construction costs have risen ever since the end of 2021. This is why builders have no choice but to pass on the increased costs to home buyers, although home buyers are not very happy about this.

The woes of home buyers are high with trying to retain high-income jobs, and their struggle to get home loans approved for properties of their choice. The lenders are all the warier in approving home loans in the post-COVID era. This is made more difficult with the rising cost of construction which puts home buyers on the back foot. Home buyers in India are in a dilemma whether or not the prices will come down. Is a price correction around the corner? The possibility seems grim!

The cost of construction has gone up mainly due to cement and steel prices going. Russia’s invasion of Ukraine and lockdowns in China have further pushed up the prices! The increase in prices has been steep ever since May 2022.

The rising costs hurt both the developers as well as home buyers across India, particularly in the affordable and mid-market segments (between Rs 40 lakh to Rs 70 lakh budget range). The margins of builders are getting very thin, and they are depending on selling more and more apartments (volumes) to stay afloat.

As home buyers, we need to be aware of what’s happening on the construction cost front. Some facts-

Facts regarding the rising cost of construction

• The cost of construction is likely to further rise beyond 5% by end of 2022
• Construction material costs will continue to increase beyond 2023
• Regardless of the stage of construction, the rise in prices is hitting everyone. For instance, the increase in prices is steep for the under-construction project since the structure is not yet ready. Similarly, even if a project is in the finishing stages, the increase in prices of accessories like tiles, and electricals are still hurting the builders. Builders in the finishing stages are still better off than those who are at the initial stages of construction
• Builders lock the prices while selling the units early on. An increase in prices is usually absorbed by the builder, but a price increase in excess of 10% is hard to absorb!
• An increase in prices has made properties dearer by Rs 500 to Rs 800 per sft for the home buyers. So, an apartment that cost Rs 4000 per sft is now costing Rs 4500 per sft or more. So, a Rs 48 lakh flat will now cost Rs 54 lakh! This is steep for the mid-segment home buyer!!
• Affordable segment buyers will be hit harder since an increase of even Rs 5 lakh is more for a home buyer with a budget of Rs 45 lacs compared to one whose budget is beyond Rs 1 crore, and they can handle a rise of about Rs 10 or Rs 15 lakh
• Builders are finding it difficult to provide basic amenities to their existing home buyers due to increased costs
• Stamp duty and registration costs are a further burden on the home buyer
• Builders are going slow on the speed of construction
• With a slated increase of construction costs by 5% to 7%, the overall costs will go up further
• Small developers suffer more as they don’t have the volume (number of apartments to sell is less) to increase
• The cost of copper and aluminum besides cement and oil has been over 10% in early 2022
• Labor costs have also gone-up post COVID
• A builder who has a budget of Rs 50 lakh will now have to go with a budget of approximately Rs 60 lakh. To make a profit, the builder will need to sell it at a higher price. This impacts the buyer
• Over the next three years – till the end of 2025, the cost of construction will further rise
• The price of steel and cement has gone up by over 40% since 2021

Will demand for 2bhk units rise due to the rising cost of construction?

• 2bhk units that had shifted to larger 3BHK units because of COVID-19 may go back to the pre-Covid trends
• Affordability is key. Those who have a budget of Rs 65 lakh and target a 3bhk may have to go back to buying a 2bhk, or a smaller 3bhk within the same budget
• New launches will continue happening because people still need homes to live in, but the configuration of the apartments will be for more efficient SMALLER apartments
• Even after Ukraine stops, the need for cement and steel will remain high in Ukraine. This means the cost of construction will remain high in India
• Post COVID-19, finishing material costs get impacted due to lockdowns in China
• The unsold luxury apartment inventory prices will also go up by another Rs 1000 per sft

Overall, will the prices get lower in the future- 2023 or beyond? The answer is NO. So, it is prudent not to delay buying your residential apartment regardless of where you live in India.

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