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Inevitable Price Rise In Real Estate Six Reasons

15th Sep 2020

 

Why Real Estate Price Rice Is Inevitable - Six Reasons

 

Real estate as an industry largely depends on human resource. At any given phase of a project's development, there are a multitude of workers - from laborers to raw material suppliers, finished goods suppliers, material transporters, security services, government agencies, sales and marketing executives, landowners, engineers, architects, contractors, consultants, brokers, lenders, bankers, technology service providers, vendors, suppliers and customers. Add to that approximately 200 ancillary units that employ workers to manufacture goods for construction. Fact is, real estate is only next to agriculture in being a labor intensive industry. Fortunately, resources are plenty in our country, thanks to an ever-growing population.

In the larger scheme of things, real estate development fosters the progress of city, state and nation. However, over the last few months the pandemic has shaken development at its very foundation at an international scale. As with any other industry, real estate has had its fair share of setbacks that have resulted in an imminent price rise of property.

Here are six reasons why this hike in price is unavoidable in the short-term. If you are a prospective home-buyer or investor, do have a read.

 

REASON 1

MATERIAL COST

Mining plays an important role in the supply of raw materials. Reduced mining of iron ore has resulted in the prices of steel (made from iron ore)to sky rocket. Steel prices are expected to increase by Rs. 2,000 - 3,000 in September 2020. Reduced mining has also affected manufacture of cement, aluminum, copper cables and the like. Lack of freight services and road transport has restricted supply of non-metallic building materials like crushed stone, gravel and sand. Insulation materials have been short in supply due to reduced production as well.

The ripple effect can be seen across the board for real estate thus affecting property prices.

 

REASON 2

GUEST WORKERS

Across the world, there have always been migrant populations seeking better work prospects.Having made an arduous journey back to their native during the onset of the pandemic, thousands of guest workers now are willing to come back to work, but are stuck without viable transportation or migrant passes, across the country. While developers are readying accommodation and hygienic living facilities to welcome back workers, they have been forced to recruit new workers at higher costs, to restart construction. So far only about 30% of guest workers have managed to return - in a city where about 90% of the total workforce are guest workers. Tamil Nadu employed about 5 lakh migrant workers pre-covid.

Having been out of work for months now, workers need to be compensated adequately to help them get back on their feet. The central government has also proposed issuing migration certificates to construction workers so that they continue to receive welfare benefits through various schemes even when they migrate to another state for work.

A strain on workforce for developers is hence a strain on the purse for home-buyers.

 

REASON 3

DEPLETING AVAILABLE STOCK

In the last few months, home-buyers have preferred to buy ready-to-occupy homes rather than invest in future projects. This has caused existing inventory to dry up. While a spike in home-buying is a positive sign, this results in an imminent shortage of supply until construction is rebooted. There will be a void for the next few quarters with a dearth of supply of homes. Having said that, as countries come out of lockdown gradually, manufacturing will resume in full force to eventually counter demand.

Until then, this price rise is something we have to bear with.

 

REASON 4

NO NEW LAUNCHES

Since March 2020, there have been near-zero new project launches across the industry. With the demand for office spaces and homes in a downward spiral, there has been lesser influx of funds in the market. Coupled with a reduced workforce and shortage of raw materials, construction was at a standstill for most part of March-July. While construction has commenced now, it will be a matter of time before things progress full steam ahead.

This imbalance of supply and demand has led to a hike i market prices of real estate.

 

REASON 5

SLOWER APPROVALS

In real estate, procurement of new land for development and the process to get government approvals for purchase forms the core of the business. Though all government offices are in full attendance now, processing of new approvals has slowed down - it is estimated to take anywhere between 12 to 18 months for fresh approvals(for large projects) to be issued. Thus, there will be a dearth of supply in the development space in the coming quarters.

With reduced inflow of monies and extended approval periods, a price hike is unpreventable.

 

REASON 6

GOVERNMENT TAXES & CHARGES

A major chunk of government funds are being redirected to fight the pandemic and reboot the economy. To counter the revenue shortage of the state, the government has had to hike various fees with a direct implication on real estate. Hiked EB deposits for all approvals and development cost, and increase in guideline value of land have led to an overall increase of total costs.

As we get back to normalcy and people start investing, the lack of supply created by this crunch will also drive up prices of property.

WE SHALL OVERCOME

As states and countries start easing restrictions on commerce, travel and the economy, there will be gradual progress towards a level of normalcy. While a new normal is already in place, the impact of this new normal in the long term is unpredictable. But what we can predict is the indomitable spirit of mankind to rise after a setback. And when that spirit is rekindled, it will set the path for progress for the decade to come.

I'd like to leave you with this quote by American author Margaret J Wheatley:

"There is no power for change greater than a community discovering what it cares about".

As a community, we now know that the most important this is to care for each other.

Take care and stay safe.

 


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