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House of Woes

The contraction of the construction industry in Q3 coupled with rising raw material cost and 'wait-n-watch' by potential homebuyers mars the sector’s revival narrative

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Barely 70 days ago, while providing its outlook for 2022, Knight Frank India, a leading real estate consultancy firm said that housing prices may rise 5 per cent during 2022 on improved demand. Similarly, a CII-ANAROCK Consumer Survey - H2 2021 said 56 per cent respondents expect the housing prices to rise in 2022. "Consumers expect housing prices to rise in 2022 due to inflationary trends in construction raw materials and overall operational costs for developers." The survey, conducted between July and December 2021, polled 5,210 participants via various digital platforms across Tier-1, Tier-2 and Tier-3 cities.

"The housing prices are likely to rise 5-8 per cent in 2022 due to increased input cost pressure and supply chain issues. Hardening interest rates, which are very likely in the second half of 2022, will be another factor driving up the overall acquisition cost for homebuyers," Anuj Puri, Chairman, ANAROCK Group said.

The survey concluded that a sub-10 per cent price increase would have a moderate-to-low impact. However, an increase of more than 10 per cent would have more profound repercussions on buyer sentiment. Therefore, the larger takeaway is: "Pay more for your home in 2022."

The Numbers Game
Before moving ahead, it's important to understand the 'why' aspect of housing prices hardening despite any major uptick in buying trends. For the calendar year 2021, developers sold 2.06 lakh homes (across top eight cities that are indicative of overall housing market trends). In simpler terms, this number means an average per day sale of 547 housing units in 2021. In itself, the number sounds fantastic for the developers, not so much for the end-consumer as it is far from the potential demand for houses.  

Overall, industry reports peg the annual demand for homes (for the middle-to-high income group categories) at about a million units. That is 10 lakh units of ready-to-occupy houses. But the supply is just about 20 per cent of that requirement (based on 2021 numbers; it's even lower for 2020). And that is why there exists a perpetual 'pent-up demand' for housing units that keep driving the prices northwards, irrespective of the sales figures for any particular year. Another reason: owning a home is aspirational. And anything aspirational comes with a higher price tag.
Even though housing loans continue to corner a lion's share in organised borrowing, there is not enough delivery happening. Those who can afford to take risk, avail these loans and wait for delivery (it is 24-36 months for a reputed builder; much more for the rest). In the meantime this great mismatch continues to make fence-sitters out of lakhs of willing homebuyers.

Meanwhile, prices of essentials for the housing sector - land, cement, steel, labour - continues to go north across the top eight housing markets in the country. From October 2021 till about January 2022, cement prices rose every month. The same was true for steel. Both cement and steel are essential raw materials used in construction, especially housing. Irrespective of the fact that the housing market has been stagnant for the past several years, neither the house prices have declined, nor the consumer sentiments have shown any significant sign of easing. Lower interest rates for the past 24 months or so has also not helped in boosting demand for houses in any major way primarily because construction is a capital- and time-intensive sector. Access to cheap capital remains a challenge for most developers.

In the coming months, experts say, the government would continue to tackle rising inflation and growing stagnation, both worrisome factors for any miraculous turnaround in consumer sentiments. Yet, whatever stock of under-construction houses, particularly those in the price ranges of under Rs 60 lakh, Rs 80 lakh and Rs 1 crore, they seem to give no indication of any panic selling (at revised prices) or big discounts or a cut in retail price of housing units. Developers remain steadfast about higher sales because of pent-up demand for owning one's own property, particularly among the salaried class, non-resident Indians and others with access to wealth.

Construction Sector & GDP
The latest set of data points on GDP show that the construction sector contracted in the October-December quarter of the current financial year and manufacturing barely managed to remain flat. The construction sector witnessed a contraction of 2.8 per cent at Rs 2,66,947 crore in Q3 FY22, compared with Rs 2,74,752 crore in Q3 FY21. In Q3 FY21, the construction sector witnessed a growth of 6.6 per cent over the corresponding period of the previous fiscal (attributed to low base effect).

This sector encompasses all kind of construction-roads, bridges, railway network, airports, buildings, warehouse, housing, commercial, etc. It accounts for 5-7 per cent of the overall gross domestic product of the country. In terms of employment generation, it is considered the second largest after agriculture. Therefore, it is pertinent to understand that any fluctuations in construction has a wide-ranging impact. Why? Because it is inter-linked with the entire supply-chain network-manufacturing and selling of cement, steel, raw-materials, labour to the end-use projects getting operationalised. However, here we have dealt with the impact on housing, an important subset of construction.

The cost of construction of housing units itself has seen an escalation in recent years. The average cost for a 1,000 sq ft house swings between Rs 15 lakh and Rs 25 lakh or even more. The cost of labour is also at an all-time high. Bottom-line: Owning your own dream home in 2022 may just be limited to a select group of lucky ones, like previous years.

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Magazine 26 March 2022 real estate anuj puri