Will your dream home cost you more now?

Price is an important and imperative determinant in making the decision to buy a home. Most stakeholders expect a price increase and even developers are publicizing this fact in order to quickly close sales and entice sitters. To maintain fast sales and cash flow during the pandemic, developers have refrained from raising prices. However, when the impact of the pandemic subsided, demand accelerated and developers increased prices to take advantage of pent-up demand.

The sharp and unprecedented rise in the cost of input materials such as steel, aluminum and cement has seriously shaken up the construction industry, as project costs escalate, eroding cash flows and working capital for developers. In addition, due to the geopolitical turmoil between Russia and Ukraine, the world has seen a shortage of crude oil, which has driven up commodity prices and affected a variety of industries, including real estate. The rise in inflation was a lubricating factor for the rise in prices of various commodity products and affected the sector, especially in the past few months.

However, developers have so far resisted the urge to raise prices in 2022, choosing to absorb the consequences instead, including recent increases in raw material prices and other input costs. Strong sales in the residential sector have given them the ability to afford increasing raw material costs. Due to pent-up demand, declining inventories, and increased momentum after Covid-19, the market has seen a strong recovery and price stability has been supported in recent times. However, the situation became more and more alarming during May and June, and any additional increases in input costs could have forced developers to increase home prices. Thanks to the government’s efforts to lower the prices of raw materials, such as reducing the excise tax on gasoline and diesel, state taxes, import duties on key raw materials, and export restriction measures, the cost price of the main inputs has been reduced.

Housing price growth

Overall sales velocity in the first half of 2022 increased about 40 percent over last year in a low base affected by the pandemic. The gradual improvement was notable since the last quarter of 2020 and continued into 2021. Moreover, uptake reached its new peak in 2021, one of the best years of this decade. The market improved further and the January-March second quarter recorded the maximum sales in the past eight quarters.

As a result of the post-Covid recovery and strong sales pace, the weighted average house prices in the country rose between 5 and 6 per cent during the June-December period in 2021. NCR, Chennai and Hyderabad saw the maximum price increases on an annual basis. In the range of 5-8 percent, followed by the metropolitan area of ​​Mumbai, Bengaluru and Pune. Market affordability—high as a result of lower mortgage rates and higher income levels in most industries, particularly IT/ITeS, BFSI and pharmaceuticals—supported post-pandemic demand.

Look beyond the cost of working capital

It was believed that input costs rose by 15-20 percent in the past six months due to various economic upheavals, before showing a gradual downward trend.

However, the recent corrections to input costs are a major respite for the developer. In addition, factors such as the cost of land, labor, approval cost, stamp duty and registration cost contribute about 30-40 percent of the total project cost. Changing the marginal price or, in some cases, reducing these components, has given flexibility to maintain price stability or survive a modest increase, particularly in 2022. In a few cities, the government has additionally supported this by lowering Approval fees/installments, which were greatly helped reduce the cost of the project. While strong demand is underpinned by declining supply quality, developers with a proven track record and efficient execution can raise prices more than the average price increase in the city. It is important to ensure that sales momentum is maintained regardless of market turbulence. Developers should focus on sustenance rather than raising prices in any specific market.

Cautious approach to stable sales

Any noticeable price hike by the developer must be justified by the income profile, the buyer’s propensity to pay, the competition landscape, and consumer behaviour. Adopting a marketing strategy that fits the business context affects the velocity of sales. In view of the changing economic landscape, developers have taken a cautious strategy rather than a hasty decision to raise prices. Due to the increased cost of inputs, there was a marginal increase in the cost of housing which was compulsorily passed on to the customer.

way forward

Although major developers have so far avoided slowing construction, that could change if input costs rise further, delaying project completion. Recent government initiatives to constrain the growth of input prices have given developers scope to maintain prices. It will be interesting to see how long the developers keep raising prices. We expect demand to remain high due to lower funding rates, end user demand, government initiatives and policy support.

More developers will use advanced support technology tools that aid in decision making and sales. Significant technical advances in construction operations are expected to shorten lead times, improve quality and enhance industry resilience, which will change developer profitability and pricing strategies.

The writer is Vice President and Head of Research, ASK Property Fund

Posted in

August 27 2022

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