Real estate on the high rise again

Real estate companies are regaining their pricing power as the stock of unsold houses trends down and building costs, mainly steel and cement, keep climbing. The industry has been petitioning GoI to regulate prices, reduce taxes and allow easier imports of chief construction materials. Now, the leading developers have begun to pass the added costs on to buyers, in some cases by up to 10% of the price of a house, and they are not reporting any adverse effect on sales. The surge in oil prices, once GoI permits its pass-through to domestic fuel consumers, will add to the cost pressure in construction. Transporting materials constitutes almost a fifth of the expenses in building new apartments, which have already witnessed a 13% escalation in construction cost on account of steel and cement.

House prices in India have stayed fairly stable during the pandemic. This has been aided by low interest rates and an industry that has curbed the excesses of the previous real estate boom. The sector is on an upcycle with the pipeline of launches surpassing pre-pandemic levels. Incomes have been outpacing property prices for years, improving affordability. Construction nationwide contracted during the October-December quarter from the same period a year ago as the third wave played out, but is expected to post a smart recovery in 2021-22.

The housing market can absorb orderly price escalation. But a sustained cost push through expensive energy could derail its recovery. The real estate industry will draw assurance from the role construction, with its enormous employment linkages, is expected to play in GoI's capex push. The sector's appeal to reduce material cost pressures can be expected to find a sympathetic audience among policymakers.