Construction costs to remain volatile for next few months

The costs of key construction materials in India have been highly volatile in the recent past and are likely to remain volatile for next few months as well. And that's not without a reason. In fact the volatility can be attributed to multiple factors including the uncertainties created by geo-political issues, persistent lockdowns in China and the possibility of a global recession.

Now let's take a look at what kind of volatility the sector has witnessed over a period of time. As of March 2022, construction costs rose 10-12 per cent YoY, owing to a 20 per cent increase in key material costs. Key construction materials such as cement, steel, aluminium, copper saw a significant increase, along with fuel and labour costs due to geopolitical issues, inflation, etc. This created a challenge for developers who were facing high debt and liquidity concerns.

However, by November 2022, overall costs of key construction materials (steel, cement, aluminium and copper) declined by 8 per cent, as compared to March 2022. Aluminium registered highest decline of 55 per cent, followed by steel at 6 per cent decline. However, cement and copper costs increased by 9 per cent and 3 per cent respectively along with labour costs. This coupled with decreased fuel costs have kept overall construction costs stable since March 2022, going by a recent study by Colliers.

Again, going by the same study, as of November 2022, cost of construction has increased 28 per cent higher than pre-pandemic (November 2021) levels, but continues to be stable, compared to March 2022. The costs of key construction materials have jumped 32 per cent in a span of three years, affecting margins and operational schedule of construction companies. The government's efforts such as reducing exports and cutting import duties have kept raw material costs in check over the last few months.

One has to keep in mind that be it in India or elsewhere, the prices of key construction materials normally hinge and will hinge on multiple factors including global economic situation, inflation rates and supply constraints. Little wonder therefore that the developers are likely to push new launches till the input prices further come down, as any further surge in the cost of construction materials would impact the timely delivery of ongoing projects and disrupt their cash-flows resulting in increase in housing prices.

Simultaneously with this, developers, on their part, are also planning their projects well in advance, and doing everything possible to ensure timely project completions to cater to the surging demand. They are also increasingly adopting 'Just-In-Case' approach to store the materials well in advance to avoid supply bottlenecks and unexpected price hikes.

In the wake of all these, residential prices have been heading northward, witnessing a jump of 6 per cent YoY in Q3 2022, led by a combination of increased input costs and robust demand. Experts are of the view that going forward, prices may be more or less stable for some quarters as the market is now seeing increasing interest rates.