House and apartment prices skyrocket with escalating construction costs

 The recently released 2Q data of the House Price Index of LankaPropertyWeb revealed that the overall selling prices of apartments increased by 45.17 percent when compared to 2Q of 2021.

According to the developers and real estate agents that LankaPropertyWeb has been in contact with, these price increases are largely a cause of the demand created for real estate as a hedging against inflation, shortage in raw materials and skyrocketing construction costs.

Mainly the devaluation of the rupee against the US dollar and the shortage and high-priced raw materials have shifted people’s behaviour since March 2022, with them preferring to buy houses or apartments rather than build a home.

The uncertainties of obtaining raw materials and rising interest rates for home loans have also contributed to this behaviour.

A study on the overall asking prices of houses in Sri Lanka showed the prices had increased by 21.85 percent when compared to 2Q of 2021.

The houses for sale in the North-Western province recorded the highest increase of 31.2 percent from 1Q of 2022, followed by the Colombo house prices that had risen by 13.9 percent during the same period.

Meanwhile, the prices of apartments for sale in Colombo had increased by 32.9 percent in 2Q of 2022 when compared to 2Q of 2021.

This phenomenon takes place simultaneously at the same time as the country has battled the pandemic since December 2020 and the foreign exchange (forex) issues that worsened towards the end of 2021.

According to the LankaPropertyWeb’s Development Consultancy and Research team data, the top five searches for apartments for sale were from Colombo 6, Colombo 5, Rajagiriya, Colombo 3 and Colombo 2, respectively.

Meanwhile, the data from the Construction Industry Development Authority showed that the average price of a 50kg cement bag sold by the public and private dealers has increased by 187 percent from June 2021 to June 2022. The same increased by 98 percent from January 2022 to June 2022.

The home loan interest rates that recorded the lowest at 7 percent p.a. after decades during 3Q 2021 have also been increasing with their current highest being at 22 percent and negatively influencing the property buying decisions of the first-time homebuyers.

In addition to this, LankaPropertyWeb’s recent studies on the Land Price Index (based on asking prices) also show that the rate of land prices increasing on a quarter-to-quarter basis in the Colombo city has slowed down over the past quarters. Lands for sale in Colombo 3, 4, 5, 6 and 7 recorded the slowest percentage increase in prices in the last five years. While the rate of prices increasing in lands for sale in Colombo 9, 13 and 15 were at a peak of 113 percent, 87 percent and 47 percent, respectively during 1Q 2018 to 1Q 2022. This is mainly due to the construction of many mixed development projects that are expected to drive the prices further in the future. Elsewhere in the Western province (except Colombo 01-15), the per perch prices of lands for sale in Ingiriya and Horana, which once had the lowest rate of price increases, have seen the highest increases and lands, which had the highest prices, such as prime Colombo areas, have seen the prices stagnate or drop between 2Q 2021 and 2Q 2022.
“With the Central Bank’s decision to float the Sri Lankan rupee in March 2022 and due to the inflation surge to a record high, we saw a rapid increase in demand for completed condos in the primary and secondary markets as well as for the houses as a hedge against economic calamity.

Especially expats’ interest in Sri Lankan real estate increased to gain in the rupee devaluation. This behaviour was further recorded on the LankaPropertyWeb portal that in fact saw a surge in search traffic from countries such as the UK, Australia, the USA, Canada and the UAE,” added LankaPropertyWeb Head of Research Tharindu Jayarathne.

In addition to this, according to the press release of the Prime Minister’s Office on 31/05/2022 proposed tax reforms, the exemption granted on Value-Added Tax (VAT) on residential condominiums shall be removed from 01/10/2022.

This is expected to drive the prices in the future when buying apartments directly from the developers and considering the probability of VAT being imposed in the near future. Thus, now is a good time for buyers willing to invest in apartments to plan ahead before VAT comes in.