Real estate prices in India upwardly mobile. Blame it on rising input costs

Image: Bill Barfield

You have finally made up your mind to sign out the booking amount cheque to the developer. You took a week to decide but you have. You call the sales dude and she says we will be glad to do the booking for you but the per square feet prices have gone up by INR 100. You reason, cajole, promise reference sales but the price is not budging! So what is making the developer carry on price hikes despite demand being low? Costs is the answer.

Profit = Total revenue - Total cost (lets just leave it at that, finance wizards can fill up this whole page to explain profit!)
With the 'Total cost' portion of the equation constantly climbing, returns on investment are lessening. There are equity and debt burdens on the developer and below a certain level of returns, it does not make sense for any businessman to work that hard and take such risks.

To make up the falling profits, the builders are increasing prices and you are thus in the situation we opened this article with. Staring at an extra 100 bucks a square feet outflow from your end.

At the developer end, things are not exactly rosy. Over the past few months, prices of construction raw materials like sand, cement, steel have gone up between 20 percent to 100 percent, the highest increases being in coarse and fine sand prices. Ceramic floor tiles have also been steadily climbing in prices. Put together, it is shaving off a lot of profits from the developers' balance sheets as most projects are completely booked and sale prices have been committed and its not easy to introduce a price escalation at this stage. Neither will that be ethical. Increased home loan interest rates are not helping matters by further slowing down sales. Transportation costs of raw materials are also upwardly mobile with rise in diesel prices.

We expect this trend to continue for a while and then stabilize. Sign out that cheque. Prices may climb further. Its not a one way reckless price increase by that developer. Its called inflation. From lentils, grains and real estate,the darn 'I' word affects it all!