Property prices have been on the rise in the largest of metros in India, thanks to the growing demand. Besides, proportional or exponential growth in the prices of raw materials has also contributed to these soaring costs.
Reports suggest that tech hubs like Bengaluru’s Whitefield and Hyderabad’s Gachibowli and Kondapur have topped the list of micro-residential markets that saw the sharpest property price hike in October 2023, compared with October 2020.
The soaring cost of raw materials is causing ripples that extend far beyond the construction site. Materials like 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?
The domino effect on developers and home buyers
Data from property consultant, Anarock, shows that the consistent increase in the cost of raw materials, coupled with steady demand, has led to a notable rise in residential home prices across India. As a result, in the top seven markets of the country, the average home prices have witnessed an 8 per cent rise recently.
The increase in the prices of essential raw materials used in construction — say cement, bricks, and steel — is undeniably a cause for concern for property developers. As these costs surge, developers find themselves walking a tightrope, trying to maintain profit margins while delivering affordable housing options. Ultimately, the burden of these increased costs often falls on the shoulders of home buyers.
Developers, faced with the prospect of cost overruns, are left with little choice but to pass on a portion of the rising expenses to buyers. This phenomenon, commonly referred to as “cost-push inflation,” can lead to an increase in property prices, making homeownership an even more elusive dream for many.
The electric shock: Impact on electrical and construction projects
Beyond the realm of traditional construction materials, the surge in demand for metals like aluminium, copper, and nickel is creating significant challenges for electrical and construction projects. These metals are essential components of wiring, plumbing, and various structural elements, driving up costs for both residential and commercial construction.
Copper, in particular, has been a focal point of attention due to its widespread use in electrical wiring and plumbing. The global demand for copper is surging, and as the world transitions toward cleaner energy sources, the pressure on this finite resource is only expected to increase.
While copper prices have rebounded from the lows, the long-term trend is likely to be one of continued ascent. In fact, according to government data, India’s dependence on copper imports has been exacerbated by the demand-supply gap in the international copper market and the consistently high copper prices.
Borrowing in the shadow of rising interest rates
The lending industry is not immune to the repercussions of escalating raw material costs. While this is a prudent measure to keep the economy stable, it brings added challenges for property developers and potential homeowners.
Each interest rate hike by the Reserve Bank of India (RBI) leads to higher borrowing costs for developers, affecting the cost of financing for construction projects. As a result, developers may find themselves facing not only the burden of rising raw material expenses but also elevated interest rates, compounding their financial challenges.
Furthermore, higher interest rates can ripple through the housing market, impacting potential buyers. Elevated borrowing costs can deter homebuyers, potentially leading to a slowdown in real estate transactions.
Watch out for monetary policy
The RBI had increased interest rates by 250 bps for a year before hitting a pause on four consecutive occasions. While it is expected that the RBI may cut rates going ahead — the next monetary policy falling on December 6-8, 2023 — a rate hike can have a cascading effect on the overall housing market, with decreased demand potentially pressuring developers to adjust their pricing strategies.
The rising cost of raw materials in real estate will thus, strain financing for both real estate companies and homeowners. Developers may face higher loan requirements and interest rates, potentially slowing down projects or leading to stricter lending criteria. For homeowners, increased construction costs can raise property prices, making home loans more expensive.
Lenders may respond by adjusting lending terms and assessing borrower risk more closely. In sum, the lending industry may see reduced affordability and increased risks due to escalating raw material costs in real estate.
(The author is the CEO and co-founder of Basic Home Loan)