The affordable housing segment in India is facing significant challenges as construction costs have surged by 40% over the past five years, according to recent data from ANAROCK Research. This dramatic increase in costs has led to a sharp decline in the availability and sales of affordable housing units across the country.

Declining Share of Affordable Housing

The impact of rising costs is clearly reflected in the market trends:

• New launches: The share of affordable housing in new launches has plummeted from 40% in 2019 to just 12% in the first half of 2023.
• Sales: The proportion of affordable housing in overall sales has dropped from 38% to 18% during the same period.

Key Drivers of Cost Increase

Several factors have contributed to the steep rise in construction costs:

1. Cement Prices: Despite a 15% correction last year, cement prices have increased by 30-57% over the past five years.
2. Steel Costs: Steel prices have climbed by 50% since 2019.
3. Copper Prices: A staggering 91% increase in copper prices has been observed.
4. Labor Costs: The most significant jump has been in labor costs, which have spiked by 150% since 2019, with a 25% increase in the past year alone.

City-wise Construction Costs

The cost of construction for affordable housing varies significantly across major Indian cities:

Impact on Pricing and Developers

The rising costs have put developers in a difficult position:

• Developers typically pass on 5-6% of cost increases to buyers through escalation clauses.
• Residential prices in metropolitan areas have been rising by 9-12% annually.
• Potential tariffs of 25-50% on imports could further increase construction costs by 1.5-5%.

Potential Relief on the Horizon

While the situation looks grim, there are some potential measures that could provide relief:

• Proposed GST reforms aim to reduce cement GST from 28% to 18%.
• Restoration of input tax credits is under consideration.
• These reforms could potentially provide a 2-4% price relief for affordable housing.

The affordable housing segment, once a booming part of India's real estate market, is now under severe pressure. As construction costs continue to rise, it remains to be seen how developers and policymakers will address this challenge to ensure housing remains accessible to a broader segment of the population.

In a testament to India's burgeoning luxury real estate market, Bengaluru has emerged as a top performer on the global stage, securing the 4th position among 46 cities worldwide for prime residential property price appreciation. This remarkable achievement comes from Knight Frank's latest Prime Global Cities Index report, which highlights the robust growth in India's premium housing sector.

Bengaluru Leads Indian Cities

The Silicon Valley of India recorded an impressive 10.2% annual price increase in premium housing properties, outpacing many global counterparts. This strong performance underscores the city's growing appeal to high-net-worth individuals and international investors.

Mumbai and Delhi Also Shine

Following closely behind, Mumbai claimed the 6th spot on the global rankings with a solid 8.7% growth in prime residential prices. The national capital, Delhi, also made its mark, securing the 15th position with a respectable 3.9% appreciation.

Global Context

The performance of Indian cities is particularly noteworthy when compared to the global average. While the worldwide prime residential price growth stood at 2.3% for the 12 months ending June, down from 3.5% in the previous quarter, Indian metros significantly outperformed this benchmark.

Top Global Performers

Seoul topped the global rankings with a staggering 25.2% annual appreciation, followed by Tokyo at 16.3% and Dubai at 15.8%.

Factors Driving Growth

Knight Frank attributes the strong performance of Indian cities to several key factors:

1. Robust demand for premium properties
2. Limited prime supply in key urban centers
3. Continued wealth creation in metropolitan areas

These elements have combined to create a favorable environment for luxury real estate appreciation, particularly in cities like Bengaluru, which has a thriving tech industry and a cosmopolitan lifestyle.

Implications for the Indian Real Estate Market

The impressive showing of Indian cities in the global prime property market indicates a maturing luxury real estate sector. It reflects growing confidence among affluent buyers and investors in the long-term value of premium properties in India's major urban centers.

As Indian cities continue to develop and attract global talent and investment, the luxury real estate segment is likely to remain a focal point for both domestic and international investors looking for strong returns and prestigious assets.

The resilience of the Indian premium housing market, even as global averages show signs of cooling, suggests that the country's top-tier real estate remains an attractive proposition in the international property landscape.