Data points to simmering housing crisis in the making

• Home ownership and broader real estate activities decline 6.0% in 2Q 

A simmering housing crisis in the making as a byproduct of the ongoing economic turmoil as the sector is experiencing both demand and supply side squeezes. 

According to the data released by the Department of Census and Statistics, Sri Lanka’s housing and home ownership captured by the ‘ownership of dwelling and real estate activities’ declined 6.0 percent in the second quarter over the same period in 2021, spelling trouble in the period ahead. 

The contraction in the sector could be the forerunner for the much bigger issues such as rising homelessness and inability of the economy to offer housing needs of those who work harder for upward social mobility. 

In the first half of 2022, the housing sector, which contributed 4.8 percent of the total Sri Lankan economy, declined by half a percentage point. This could deepen in the second half of the year due to the shortage of foreign exchange to import construction materials and other household goods such as furniture, fixtures and appliances.
The housing sector slump is a result of both supply and demand side squeezes. 

While home builders scramble to source construction materials they need due to the aforesaid supply crunch caused by the foreign exchange shortage, on the demand side, people have significantly lost their home affordability due to exorbitant construction costs.

Besides, many can no longer afford home mortgages as mortgage rates have more than tripled within a span of just six months. 

Average mortgage rate which was capped at 7.0 percent by the Central Bank through most of last year has surged to between 20-30 percent levels, depending on the bank, tenor and the borrower’s category. 

Sri Lanka’s housing market and the home mortgage market boomed in the two years of the pandemic which put enormous pressure on housing prices, which in some cases rose more than 50 percent or more.  

Although the demand suffered a steeper fall since March this year due to the surge in mortgage rates, housing prices remained elevated due to sharp increase in construction costs, leaving many would-be home buyers on the sidelines, possibly for years, as policies remain extremely restrictive against building and construction activities.