Will Your Dream House Become Unaffordable Due to Russia-Ukraine War?

If you were thinking of purchasing your dream house this year, the ongoing Russia-Ukraine war can play a spoiler. At a time when everyday inflation has eaten into household savings, the skyrocketing cost of building material is set to make your home more expensive.

The supply-chain crunch across the Black Sea region amidst the ongoing Russia-Ukraine crisis has further added to the woes of homebuyers. 

"There will be a significant rise in the prices. For instance, housing prices from the earlier base cost of Rs. 1800 per sq. ft., are expected to go up to Rs. 2100 per sq. ft. and premium projects will go up to Rs. 2500 per sq. ft. this will lead up to around Rs.300 additional cost per sq. ft," said Harleen Oberoi, Senior Vice President - Head Project Management, Engineering, Tata Realty, and Infrastructure Limited.

Both Russia and Ukraine are major hubs for the supply of key components such as aluminum and steel globally. 

Navneet Damani, senior vice president - commodity & currency research at Motilal Oswal Financial Services told Outlook Business, “Russia produces around 6 per cent of the world's aluminum and 7 per cent of mined nickel. Sanctions on aluminum maker Rusal in 2018 drove the metal's price up 35 per cent in days.” Nickel is an important component of the stainless-steel industry. 

“Lower inventories in metals along with strong consistent demand has been already supporting the backdrop, and with the latest trigger, it looks like the metal has got some more feet to rally," he added. 

However, even before the Russian invasion of Ukraine, the price hike in select metals, as well as the first and second wave of the Covid-19 pandemic, continued to be the sore eye for realtors. 

“The Russia-Ukraine war is only the latest pressure point on a series of pressure points. Even before the war, the pandemic had seriously disrupted logistics, thus preventing construction materials from reaching sites, even as migrant workers left the sites to go back to their home states. These factors alone increased developers’ costs tremendously,” said Anuj Puri, Chairman, Anarock Group. The steel and aluminum prices were already trading 15 per cent higher in the FY22. 

“Developers had held off from increasing prices so that the fledgling demand which had begun to return during the pandemic was not disrupted. Now, under pressure to stay financially viable, they have indicated that prices can henceforward increase between 10-15 per cent,” he added. 

According to the data available on Statista, between 2016 and 2020, the cumulative demand for residential housing among the middle-income group of the eight biggest cities of India was 1,457 units, whereas the supply was 647 units. Similarly, the cumulative housing demand among the low-income group was 1,982 units, whereas the supply was only 25 units. 

“Supply is ideally dictated by demand – though, as we had seen in some highly speculative markets of India in previous years, this is not always true. Organic demand is currently very healthy, and developers will continue to build projects, keeping a careful watch on overall absorption trends. They may moderate the supply pipeline if demand slackens perceptibly – but as of now, this seems unlikely as most people are buying out of genuine desire and need, and not from an investment perspective,” Puri said. 

“The availability of home loans at decadal low-interest rates will ensure that they can fulfil their aspirations. Price increases are a natural and even desirable phenomenon and one of the main reasons why people invest in homes in the first place. However, the increased prices may cause sales velocity to slacken to some extent, especially in the price-sensitive affordable housing category,” he added. 

According to a report by ANAROCK Property Consultants, till November 2021, at least 71,307 projects had been registered under Real Estate (Regulation and Development) Act (RERA). Formulated in 2016, RERA aims to protect the home purchasers to boost real estate investments. Experts say that a price hike in key commodities would not have any impact on the ongoing projects.

“RERA has ensured that projects which have been launched must be completed within the stipulated timeframe. Therefore, the increased cost of construction is unlikely to impact the construction pace. The market is now largely dominated by well-capitalized large players. However, some smaller players in tier 2 and tier 3 towns and cities may face challenges in completing their projects on time,” Puri said. 

Regarding how the real estate sector is bracing itself to meet the demand as the supply crunch of key raw materials continue, Puri said, “As of now, the supply of critical construction raw materials has been impacted - but it has not ground to a halt. Nevertheless, we may see a faster pace of consolidation wherein smaller, under-capitalized developers sell their unfinished projects to bigger, better-funded players, or enter into joint development agreements with them.”