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Increase in material cost

The recent increase of prices of building material are being published and discussed in many articles in the newspapers as well as online news portals. The extent of increase in price is reported to have caused more than 30% increase in cost of construction. Prices of items like steel bar and cement have increased the most and others to a lesser extent.

Some developers have announced that prices of new launch will see an increase of 25% to 30%. Let us see objectively if the proposed increase is justifiable.

The selling price of a property is computed with of the followings:-

1. Cost of construction
2. Professional fees
3. Finance charges
4. Authorities processing fees & contribution
5. Office overhead
6. Land cost
7. Profit margin

Out of the above list of cost, two items namely cost of construction and land cost constitute the major portion of the selling price.

Cost of construction forms about 40% or higher percentage of the selling price depending on the location of development. In city area where land cost is high, cost of construction constitute a smaller portion of selling price. In rural area where land cost is low, construction cost form the major part of the selling price.

Assuming if the construction cost constitute about 40% of the overall development cost, then an increase of 30% in cost of construction will only result in approximately 12% (0.4 x 30%) increase in the selling price if the developer were to maintain the profit margin in absolute dollars and cents, however if the developer would want to maintain the margin in term of percentage of the cost, then the resulting increase would be higher than 12%. In any case there would not be a corresponding increase of 30% in selling price just because the price of construction has increased by 30% as the cost construction is only a part of the overall selling price.

In fact, the price of properties in prime area has been increasing at much faster pace even before the recent huge hike in material price due to increased demand from investors hoping to sell later at higher price.

Those who have bought properties before the recent hike in material price may be pretty happy now that the price of property in good location will see good support because even if there are new launches in the same area, the price will not likely to be cheaper because the cost of construction has gone up and there are no indication at the moment that the price of material will soften.