Construction cost increase can impact affordable homes demand: Harsh Patodia of CREDAI

In January, developers did see some slowdown in queries and site visits. Construction work slowed down in some pockets too. Bookings remained stagnant, but demand was back mid-February onwards as the Omicron wave started receding. From February to now, there is good demand, say an 8–10 per cent month-on-month growth with ready-to-move-in properties driving demand in key markets like the four metroes, Pune, Bengaluru, Hyderabad, Ahmedabad and so on.  

Home prices were up 5 per cent year-on-year till December 2021 and stayed so even in January–February 2022. Some micro-markets saw even a 10 per cent rise, but it was project specific. This increase was driven by input cost rise. And we were able to pass it on, without much hit on demand.

The geo-political tensions in Europe have had an impact on building material prices here. And the trend of price rise is quite worrying. April onwards, construction cost will rise 10–15 per cent; and a similar 10–15 per cent hike in finished home prices are expected.

Cement costs have risen by more than ₹100 a bag, while steel prices have nearly doubled from ₹45,000 a tonne last year to ₹85,000 as of date.

Some projects are getting steel at lower than spot market prices, say a discount of ₹2,000–2,500 per tonne, but that will be revised upwards in April. So the benefit does not accrue.

In percentage terms, cost of key materials like cement and steel have risen over 20 and 30 per cent y-o-y in March 2022 itself. Aluminum is up 44 per cent. This comes after a 8 to 9 per cent increase in construction cost in December 2021, most of which was absorbed by smaller developers even as listed ones calibrated their hikes so as not to spook demand.

Affordable homes, at around ₹50 lakh and below, will be worst hit. They have a 10–15 per cent profit margin unless you are cross-subsidising with premium offerings in the same plot. So, a 10–15 per cent increase in construction cost means affordable home prices either move up by at least 20 per cent, or the developer’s margins get wiped out. There is less bargaining power there. Some developers will simply stop new construction activities or launches and wait till prices cool down to be back in the market.

Bigger projects or listed developers are in a far better position to hike prices, which they do by some single percentage point every quarter. Demand in premium or ultra-premium are unlikely to be hit. Margins there are also better.  

We have written multiple times. Ideally, we would like the government to ask steel-makers to provide discounts on construction grade steel, at least for affordable housing projects.