by Akash Pharande, Managing Director, Pharande Spaces
Recently, the apex realtor's body CREDAI made a startling announcement - that housing prices will probably go up by as much as 15% soon. At first glance, this announcement appeared to put homebuyers on notice. At the very outset here, I would like to clarify that this is not the case at all.
This was not a warning to homebuyers to buy homes immediately or face hiked prices in the future. The announcement clearly mentioned that housing prices might increase by 10-15% if there is no rationalization in the cost of construction raw materials. It went on to strongly indicate that the government needs to intervene to reduce these costs on developers.
Yes, the Government can intervene
Let me be very clear - it is within the government's ability to do so. First and foremost, it must reduce the GST levied on raw materials used for construction. Considering that housing is a basic need and developers are catering to this need, there is no reason why the taxation on these raw materials should be so high.
Secondly, we have repeatedly highlighted that the constant rise in the basic cost of cement and steel is because manufacturers of these raw materials have created a cartel that unjustly inflates the prices. Let me explain how this works.
What is a Cartel?
Cartels are created when manufacturers conspire to control the prices of a commodity. In other words, various manufacturers agree to increase their prices simultaneously so that there appears to be no disparity. When every manufacturer charges the same price for a commodity like cement, this 'unity' makes it next to impossible to prove that the prices are unfair.
The customers for raw materials like cement are real estate developers, who are left with no option but to buy cement at the inflated price. Moreover, such a cartel will make it impossible for new cement manufacturers to gain a footprint in the market. The price of cement has effectively doubled. A similar situation is taking place among steel manufacturers.
Simultaneously, developers face huge price hikes for polymers, resins, and plastics required for the insulation and piping used in housing projects.
What are the options?
In any other industry, inflation in manufacturing costs is passed on to the customers. This is the only way manufacturers can remain profitable enough to continue their businesses. However, in the real estate industry, housing prices have remained almost the same for over three years now.
The demand for housing was relatively low before the pandemic, so developers could not increase their prices because doing so would have further affected sales. After the second Covid-19 wave, demand for homes has grown tremendously. Increased demand always leads to increased prices but real estate developers kept their prices low.
This is no longer sustainable. There are now only two possibilities:
1. If the government is serious about delivering Housing for All, it must reduce GST on construction raw materials and enforce their fair and equitable pricing. This will help developers to keep prices attractive for homebuyers for a while longer.
2. If these measures are not taken, homebuyers will have to bear the inflated costs of construction materials via higher property prices.
What are developers' profit margins?
It is a common misconception that real estate developers enjoy humongous profits. Let's set the record straight here - in most real estate segments, developers are working on very thin profit profit margins. The margins for housing projects were between 20-30% in earlier years and have now dropped to 8-10% - and even lower in affordable housing.
Developers naturally want to keep their customers happy, but they must also ensure their businesses continuity.
At this point, it is difficult to predict which of these two scenarios will finally play out. However, inflation eventually affects the cost of everything, including real estate. Currently, the annual baseline inflation rate is around 5.56%. So far, real estate developers have insulated their buyers from this natural dynamic. It may not be possible to do this much longer.
An increase in housing prices is inevitable. But homebuyers should also realize that, as with every investment asset class, appreciation is a desirable quality. Likewise, appreciation of property prices is not a loss but an increase in the value of the investment.
