Cost of Construction in India: Rising and It’s Growing Challenge for Builders and Homebuyers

Construction costs in India have been rising every six months since 2021, burdening both builders and home buyers. Builders have to pass on these increased costs to home buyers, who are understandably unhappy. According to a recent JLL report, the Construction Cost Guide 2024, there is likely to be an average increase of six per cent across various sectors in the country.

Home buyers who seek 2bhk or 3 bhk apartments are already struggling to maintain high-income jobs and get home loans approved. Lending banks are also overly cautious in approving home loans in the post-COVID era. The rising construction costs make this even harder, putting home buyers at a disadvantage. Many are uncertain if prices will decrease anytime soon, but a price correction seems unlikely.

The main reasons for the cost increase are higher prices for cement and steel, driven further by Russia’s invasion of Ukraine and lockdowns in China. The steep rise in prices has been noticeable since May 2022.

These rising costs impact both developers and home buyers across India, especially in the affordable and mid-market segments (Rs 40 lakh to Rs 70 lakh budget range). Builders’ margins are becoming very thin, forcing them to rely on selling more apartments to stay afloat.

In Q2 2024, residential prices continued to rise in India’s top seven cities (Delhi NCR, Mumbai, Chennai, Hyderabad, Bengaluru, Pune, Kolkata). Year-on-year price increases ranged from 5% to 20%. Delhi NCR saw the highest price increase, with a significant jump of about 20%, while Bengaluru followed closely with around a 15% increase.

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

Rising Construction Costs in India: Key Facts

1. Expected Increases in 2024 and Beyond:
   • Construction costs are expected to rise by more than 6% in 2024.
   • Costs for construction materials and labor are projected to continue increasing beyond 2024.
2. Impact on Projects at Various Stages:
   • The increase in prices affects all stages of construction. Under-construction projects face steeper cost hikes as the structures are not yet complete. Even projects in finishing stages feel the impact due to rising prices of accessories like tiles and electricals.
3. Price Lock and Absorption Challenges:
   • Builders often lock prices early on when selling units. While they usually absorb price increases, a hike exceeding 10% is difficult to manage.
4. Effect on Home Buyers:
   • Rising construction costs have increased property prices by Rs 500 to Rs 800 per square foot. For instance, an apartment that cost Rs 4500 per square foot now costs Rs 4800 or more, raising the price of a Rs 54 lakh flat to Rs 57.60 lakh, which is steep for mid-segment home buyers.
   • Affordable segment buyers are hit harder, as a Rs 5 lakh increase is more significant for a buyer with a Rs 55 lakh budget than for one with a budget over Rs 1 crore.
5. Challenges for Builders:
   • Builders struggle to provide basic amenities to existing buyers due to increased costs.
   • Stamp duty and registration costs further burden home buyers.
   • Construction speed has slowed due to rising costs.
   • Small developers suffer more as they lack the volume to offset rising costs.
6. Material and Labor Cost Increases:
   • Prices of key materials such as copper, aluminum, cement, and oil have risen by over 10% since early 2022.
   • Labor costs have increased over the last 4 years.
7. Long-term Outlook:
   • Over the next three years, until the end of 2025, construction costs are expected to rise further.
   • The price of steel and cement has been steadily rising, with reports from Economic Times confirming a 40% increase in 2021.

Will demand for 2 BHK units rise due to the rising construction costs for middle class home buyers?

• Before COVID, many people preferred 2BHK apartments but later shifted to larger 3BHK units post COVID. However, with the rise in prices, these buyers might return to purchasing 2BHK apartments.
• Affordability is crucial. Buyers with a budget of Rs 65 lakh aiming for a 3BHK apartment might have to settle for a 2BHK apartment or a smaller 3BHK apartment within their budget.
• New launches will continue because people still need homes. However, the focus will be on more efficient, smaller apartments.
• Prices of unsold luxury apartments will also increase by another Rs 1000 per square foot.

Good News for Hyderabad, Telangana

In Q1 of 2024, Hyderabad’s housing market has flourished, reflecting the city’s progressive spirit, much like a river that continually carves new paths. The strong IT industry acts as the heart of this growth, pumping vitality into the economy and drawing professionals from all over India in search of promising opportunities. This influx has sparked the development of diverse residential properties throughout the city.

Hyderabad presents a wide array of housing options, accommodating various budgets and preferences. Whether in Kokapet, Sainikpuri, or Yapral, home buyers can find 2BHK and 3BHK apartment homes that meet their unique needs. High-end buyers with budget of over 2 crores can opt for larger, luxurious projects in areas like Neopolis- Kokapet, while those seeking greenery, value-for-money, and a natural habitat can find affordable apartments in standalone building apartments constructed on smaller plots ranging from 500 to 1200 square yards. These standalone building apartments are preferred by home buyers in Hyderabad in the well-established colonies of vibrant localities of Hyderabad like Alwal, Sainikpuri, and Yapral.

Don’t Delay: Seize the Opportunity to Buy Property Now

Will prices drop in the future—2023 or beyond? The answer is a resounding NO. Think of the property market as a rising sun; waiting for prices to fall is like waiting for the sun to set in the morning. So, it’s wise not to delay buying your residential apartment, no matter where you live in India.

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