Real Estate

Impact of Rising Construction Costs on Residential Market

Pune Housing construction

Just when Pune’s housing market was recovering reasonably well with good demand and supply, the second Covid-19 wave disrupted its growth momentum. To make things worse, there has been a steep rise in the prices of construction materials like cement and steel, over and above increasing labour costs.

There are more than 2.5 lakh homes currently being built all across Pune city, with 22% of them in the Pimpri-Chinchwad Municipal Corporation (PCMC). The rising cost of building homes will adversely affect this new supply because many developers in Pune are already facing financial problems. 

Some of them may have to stop construction of their projects altogether because of a lack of funds, and homebuyers who had invested in these projects will suffer.

While property prices are a constant source of discomfort to both builders and their customers, the fact is that developers are already working with wafer-thin profit margins. Unfortunately, in this kind of scenario, prices are bound to go up at a time when people are just emerging from the long lockdown and will go house-hunting again.

Because increased prices affect buyers and well as developers will suffer.

Skyrocketing Cost of Construction

In the one year since Covid-19, Pune’s residential market has seen several changes – some good and some bad. On the positive side, demand for homes increased after the pandemic set in – not only from middle-aged buyers but also from youngsters. The last time we saw so much demand from millennials was during the peak of Pune’s IT-boom.

Almost every age group now wanted to buy their own homes. According to PropEquity, an online real estate data and analytics platform, Pune saw a 31% growth in housing sales (highest among all cities) between January and March 2021. About 25,252 homes were sold in Q1 2021, and 19,221 in Q1 2020.

All seemed well till the second Covid-19 wave beginning early April and the lockdowns that followed when the cost of critical raw materials went through the roof. Steel prices are currently at an all-time high with wholesale prices of hot-rolled coils touching approx. INR 69,000 per tonne. A year ago, it cost almost half the price. Steel constitutes about 15% of any construction project’s cost.

At the same time, cement prices increased to almost INR 440 per bag from approx. INR 280 last year. Also, the prices of plastics, polymers and resins used in piping and insulation have increased a lot in recent times. All this has not only dented developers’ already thin profit margins but has put a question mark on the survival of many of the smaller ones.

Labour cost increased because there has been an acute shortage of construction labourers since the pandemic began last year. Many labourers in Pune who hail from other states like Bihar and Uttar Pradesh journeyed back to their villages and never returned. Realtors body CREDAI also recently conducted an India-wide survey and found that at least 92% of the developers are facing a shortage of construction labour.

Builders who have tried to keep labourers at sites had to provide them not only with food, shelter and security but also needed to look after their medical needs, including vaccination and healthcare for labourers and their families who were infected with the coronavirus. All in all, the overall cost of construction has gone up by at least 10% for more than 88% of developers, according to the CREDAI survey.

Urgent Government Intervention Needed

The continuous increase in the prices of steel and cement is something only the government can solve. After all, it is heavily invested in its Housing for All by 2022 scheme, which looks very unlikely in a scenario where builders cannot complete their projects and need to increase property prices just to break even.

Also, the government has pledged to create jobs at the bottom of the economic pyramid. Well, over 40 million workers are employed in real estate construction and more than 250 related industries depend on real estate to stay in business.

Finally, the government must take measures that help improve homebuyer sentiment. One such policy master-stroke was the time-limited stamp duty cut by the Maharashtra government which did a lot to encourage people in large cities like Pune and Mumbai to finally fulfil their dream of buying their own homes. This measure must be reinstated urgently for at least 6 more months

The constant rise of steel and cement is unnatural and not based on real market parameters. It is the result of some powerful suppliers cornering the market and engaging in monopolistic profiteering. This process must be immediately broken, just as it was in the case of foodgrain hoarding.

These are urgently required interventions. Real estate is a national resource and must be protected against such practices – for the good of all, and ultimately the progress and global stature of the nation.

Also read: One Year of COVID – Pune Housing Market Holds its Ground

By: Akash Pharande is Managing Director Pharande Spaces a leading real estate construction and development firm famous for its township properties in West Pune. 

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