Property prices in India’s largest metros have risen due to rising demand. Besides, the proportional or exponential rise in the cost of raw materials has also contributed to this upward cost.
Reports suggest that tech hubs like Bangalore’s Whitefield and Hyderabad’s Gachibowli and Kondapur topped the list of micro-residential markets that saw the highest property price growth in October 2023 compared to October 2020.
Rising costs of raw materials are creating ripples that extend beyond the construction site. Cement, bricks, steel and more are witnessing unprecedented price hikes, and the consequences are being felt across the lending and borrowing sectors.
So, how are these challenges reshaping the dynamics of housing finance?
Domino effect on developers and home buyers
Data from property consultancy, Anarock shows that the continuous increase in raw material prices, coupled with steady demand has led to a significant increase in residential house prices across India. As a result, in the nation’s top seven markets, median home prices recently increased by 8 percent.
Rising prices of essential raw materials used in construction — cement, bricks and steel — are undoubtedly a cause for concern for property developers. As these costs rise, developers are pacing themselves, trying to maintain profit margins while providing affordable housing options. Ultimately, the burden of these increased costs often falls on the shoulders of homebuyers.
Developers, faced with the prospect of rising costs, have little option but to pass on a portion of the rising cost to buyers. This phenomenon, commonly referred to as “cost-push inflation,” can lead to rising property prices, making home ownership a more elusive dream for many.
Electric shock: Effects on electrical and construction projects
Beyond the realm of traditional construction materials, increased demand for metals such as aluminum, copper, and nickel are creating significant challenges for electrical and construction projects. These metals are essential components of wiring, plumbing and various structural components, adding to the cost of both residential and commercial construction.
Copper, in particular, has been the focus of attention due to its widespread use in electrical wiring and plumbing. Global demand for copper is increasing, and the pressure on this limited resource is only expected to increase as the world transitions to cleaner energy sources.
Although copper prices have bounced back from the lows, the long-term trend may continue to be uphill. In fact, according to official data, India’s dependence on copper imports has increased due to the demand-supply gap in the international copper market and persistently high copper prices.
Borrowing in the shadow of rising interest rates
The lending industry is not immune to reactions to rising raw material costs. While this is a prudent measure to keep the economy stable, it brings additional challenges for property developers and prospective homeowners.
Every interest rate hike by the Reserve Bank of India (RBI) leads to higher borrowing costs for developers, which affects the cost of financing for construction projects. As a result, developers find themselves burdened not only with rising raw material costs but also with higher interest rates, compounding their financial challenges.
Furthermore, higher interest rates can ripple through the housing market, affecting potential buyers. Higher borrowing costs can deter homebuyers, potentially leading to a slowdown in real estate transactions.
Keep an eye on monetary policy
The RBI raised interest rates by 250 bps for one year before pausing four times in a row. While it is expected that the RBI may cut rates going forward — the next monetary policy will be held on December 6-8, 2023 — a rate hike could have a cascading effect on the overall housing market, forcing potential developers to adjust their pricing strategies along with reduced demand.
Rising cost of real estate raw materials will thus, put pressure on financing for both real estate companies and homeowners. Developers may face higher borrowing requirements and interest rates, potentially slowing projects or leading to stricter lending criteria. For homeowners, increased construction costs can increase property prices, making home loans more expensive.
Lenders may respond by adjusting loan terms and more closely assessing borrower risk. Overall, rising raw material costs in real estate could reduce affordability and increase risk in the lending industry.
(The author is CEO and Co-Founder of Basic Home Loans)
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