scorecardresearchHow affordable housing in India has become unaffordable
The ongoing conflict between Russia and Ukraine may have an impact on Indian housing prices.

How affordable housing in India has become unaffordable

Updated: 28 Mar 2022, 05:28 PM IST
Real estate developers are concerned about rising input costs as a result of geopolitical tensions between Russia and Ukraine.

If you were planning to buy your dream home this year, the ongoing Russia-Ukraine conflict could derail your plans. At a time when everyday inflation has eaten away at household savings, the skyrocketing cost of building materials is set to increase the cost of your home.

The ongoing conflict between Russia and Ukraine may have an impact on Indian housing prices. Real estate developers have expressed concern about rising input costs as a result of rising geopolitical tensions between Russia and Ukraine.

"There will be a significant rise in the prices. For instance, housing prices from the earlier base cost of Rs. 1800 per sq. ft., are expected to go up to Rs. 2100 per sq. ft. and premium projects will go up to Rs. 2500 per sq. ft. this will lead up to around Rs.300 additional cost per sq. ft," said Harleen Oberoi, Senior Vice President - Head Project Management, Engineering, Tata Realty, and Infrastructure Limited, told Outlook Business.

According to a report 'Real Insight Residential - Annual Round-up 2021' by Property Housing prices across eight major cities in India, including Mumbai, Delhi, Chennai, Kolkata and Bengaluru, rose by 3 per cent to 7 per cent, partially due to the rise in the rates of construction materials like cement and steel, an industry report showed.

The housing markets in Ahmedabad and Hyderabad experienced maximum appreciation with an annual price hike of 7 per cent each in 2021. Moreover, prices appreciated by 6 per cent in Bengaluru and 3 per cent in Pune and 4 per cent in Mumbai. Meanwhile, Chennai, Delhi NCR and Kolkata saw a 5 per cent rise in rates. Housing sales increased 13 per cent in 2021 to 2,05,936 units from 1,82,639 units in the previous year.

Construction cost has gone up

Both Russia and Ukraine are major hubs for the supply of key components such as aluminium and steel globally.

Prices of essentials for the housing sector - land, cement, steel, labour - continues to go north across the top eight housing markets in the country.

From October 2021 till about January 2022, cement prices rose every month. The same was true for steel. Both cement and steel are essential raw materials used in construction, especially housing.

According to various brokerage reports based on dealer interactions, the pan-India average cement price rose by over 10% to 395 per 50 kg bag as of March 22, 2022, on a month-on-month basis. It grew by 11% based on the year-on-year comparison, ET reported.

Domestic steelmakers have raised the prices of hot-rolled coil (HRC) and TMT bars by up to 5,000 per tonne. After the price revision, a tonne of HRC would cost about 66,000.

Saransh Trehan, Managing Director, Trehan Group said, “Prices of cement and steel have increased sharply over the last two years. Steel price has increased over 100%, whereas cement price has gone up by more than 30% in the last two years. Similarly, be it cost of aluminium materials, electric wire, Paints, stone all are up by more than 50% during the same period.” 

 Material (Sq.ft Cost)Prices in (2020)Prices in (2021)Difference  Change (%)
Electric Wire512.57.550%
Plumbing material1001505050%
CP Fitting Material1001505050%
Aluminium Material17629011464.77%
Fire Fighting Steel49.584.9635.4671.63%
Internal Painting812450%
Aluminium Window22034512556.81%
Source: Trehan Group    

The construction industry has to bear the brunt of the increase in steel and aluminium price. With steel prices up by 65% and aluminium and copper prices by 30% in the country in the last 18 months, the cost of construction has gone up, said Builders Association of India vice president Neerav Parmar.

Russia is the third-largest global producer of nickel, a key raw material used in stainless steel production. It is also a leading global exporter of iron ore pellets. Supply disruptions of these key ingredients have impacted the availability of steel.

Builders have to pass cost increases on to home buyers to protect margins. So, if the geopolitical tensions persist, there will be an at least 10 per cent increase in home prices over existing rates,” Harsh Vardhan Patodia, President, Confederation of Real Estate Developers’ Association (CREDAI), told Business Line.

A recent CII-ANAROCK survey found that an increase of under 10% in prices would have a moderate-to-low impact, while an increase of more than 10% would have profound repercussions on the buyer sentiment.

Home Loans will get costlier

Lower home loan interest rates are always a lucrative proposition for property buyers. Over the past two years, there has been a steep decline in the repo rate. Home loan rates, which are now linked to the repo rate, have also fallen to record lows.

But 2022 is being seen as the year when home loan rates may start to rise again.

The Reserve Bank of India (RBI) in its latest monetary policy review meeting decided to keep the repo rates unchanged at 4% and the reverse repo rate at 3.35%. In fact, there has been no change to the repo rate since May 2020. Property buyers today are able to get home financing for less than 6.5% now, a historic low, but this can’t continue forever.

Repo rate basically is the interest rate at which the RBI provides overnight liquidity to banks. If it goes up, home loans become expensive. If it goes down, loans get cheaper.

As inflation rises, there may be no room for more cuts. Over the past two weeks, various banks like HDFC Bank, State Bank of India (SBI), IndusInd Bank, IDBI Bank etc have hiked interest rates of various FD tenures. Others too may soon follow suit. Rising deposit rates hint at rising loan costs as well.

From October 2019, RBI mandated banks to link loan interest rates to external benchmarks such as the repo rate or the T-bill rate. Most banks have adopted the RBI’s repo rate as their home loan benchmark. A repo-linked home loan has a stabler interest rate and is also easier for consumers to understand in terms of pricing, spread, and expected rate revisions. This was not the case with older benchmarks.

Additional taxes on homes

Across some major cities, metro cess is imposing on property. It is intended to be used for funding transport infrastructure projects like Metro, bridges and flyovers in the state.

Maharashtra government announced metro cess. Property buyers from Mumbai, Thane, Navi Mumbai, Pune, Nagpur and Nashik, where the metro projects are being implemented, will have to pay 1% metro cess in addition to 5% stamp duty on sale, gift and mortgage documents executed from April 1, 2022.

In the case of Mumbai, where the government is pursuing the development of a metro rail network of over 300 km, the revenue mobilization through metro cess will be approximately 1,000 crore in fiscal 2022-23. According to the revenue department, the stamp duty collection from Mumbai alone is worth 7,000 crore annually. In the rest of the cities, the government expects to mop up a total of 900 crore through metro cess.

Housing sector Contribution to Indian GDP

The latest set of data points on GDP shows that the construction sector contracted in the October-December quarter of the current financial year and manufacturing barely managed to remain flat.

The construction sector witnessed a contraction of 2.8 per cent at 2,66,947 crore in Q3 FY22, compared with 2,74,752 crore in Q3 FY21. In Q3 FY21, the construction sector witnessed a growth of 6.6 per cent over the corresponding period of the previous fiscal (attributed to low base effect).

This sector encompasses all kinds of construction-roads, bridges, railway networks, airports, buildings, warehouses, housing, commercial, etc.

It accounts for 5-7 per cent of the overall gross domestic product of the country. In terms of employment generation, it is considered the second largest after agriculture.

As a result, it is critical to understand that any changes in construction have a wide-ranging impact. This sector is intertwined with the entire supply chain network, from the manufacture and sale of cement, steel, raw materials, and labour to the completion of end-use projects.

In recent years, the cost of building housing units has risen. A 1,000 sq ft house can cost anywhere between Rs. 20 lakh and Rs. 30 lakh, or even more. Labour costs are also at an all-time high.

As in previous years, owning your own dream home in 2022 may be limited to a select group of fortunate individuals.

“We have not been able to pass on the increase in input cost to customers. But relentless rise in input costs is hurting our profit margins in a big way, and forcing us to think about the future course of action,” Trehan said. 

Commodity prices and stock market
Commodity prices and stock market
First Published: 28 Mar 2022, 08:29 AM IST