The war and invasion in Ukraine has hijacked the world’s economic equilibrium; without the support of Russian crude oil & natural gas, Europe is facing an energy crisis. This is causing a sharp rise in oil prices the world over. How this affects real estate prices is by interfering with prices for raw materials like steel, cement, etc., which require large amounts of crude oil and fuels. Before the war started, world economies were only beginning to recover from the pandemic; which made them overly sensitive to these fluctuations and uncertainty.
Construction materials account for 2/3rd of project cost for developers.
Driven by inflation and the war, the cost of cement and steel has risen by more than 20% as of March 2022, so have the prices for other commonly used raw materials in construction. Steel prices in particular have been majorly affected; it has become costlier by 10% in March 2022 only, and manufacturers have increased their prices by ₹5,000 per tonne after the way started. Real estate developers are particularly sensitive to rising raw material cost, since it accounts for 2/3rd of project cost for developers. The following table shows the year-on-year change in the prices of raw materials.
Post-pandemic, demand for most commodities has risen. However, this increase in demand has not been followed by a proportionate rise in supply. For instance, there is great demand for cement; except, high input costs and rising coal prices have compelled cement manufacturers to increase prices. Similar dynamics are playing out all over the international and domestic commodities markets.
The effect of these forces is that real estate costs for developers is going up, effectively leading to a rise in rates for residential projects and commercial properties. This is a nationwide trend, and nobody has been left untouched by this. Sourced from the Times of India, the following data shows the rise in yearly and quarterly change in property rates in major Indian cities.
Despite rising prices, real estate developers, marketers and commentators are optimistic. There are many reasons to feel so, the period between October 2021 and February 2022 showed great promise for growth since demand and sales both seemed to be up. (Source: NK Realtors) The following few points elaborate why the market seems optimistic.
There is a crucial insight behind why demand and sales are up: the pandemic brought domestic concerns to the forefront and many home owners started looking at their living arrangement in a new light.
In a bid to give a boost to the real estate sector, the state government had cut stamp duty and circles rates last year. This policy has been twice extended; first by 3 months, and for the second time by 6 months. By some calculations, home buyers can save anything between 20-30% on their purchase, thanks to this policy.
For a long time, interest rates for home loans have been on a downward trajectory, encouraging many families to close the deal on their choice of home. However, this trend may not continue—rising inflation might compel RBI to increase interest rates soon.
All in all, there are many factors influencing dynamic changes in the real estate market right now. Nevertheless, both home buyers and real estate developers have shown that genuine interest and need-fulfilment can neutralise these factors and create an atmosphere of optimism in the market.