It is the steep rise in land rather than construction cost that has made housing unaffordable to many, writes C.H. Gopinatha Rao

The cost of a residential property has two components: the land and the building. A few decades ago, the cost of construction was reasonable and the appreciation of land value was marginal. Even then the middle-income group found it difficult to acquire property because of their low purchasing capacity and non-availability of loan on soft terms. They considered themselves lucky when the Government or Housing Board allotted land.

Today a section of people enjoy high purchasing power and many tax benefits. They find real estate and private housing not only affordable but also lucrative to invest in. It is the lower and middle-income groups that are left out. A close look at the trend and appreciation of housing costs will indicate that it is the steep rise in land cost than the construction cost that has made housing less affordable to many.

The cost of construction is worked out based on the detailed estimate of the items of work and unit rate of different items. The sum total will give the cost of construction. The unit rate is arrived by doing a rate analysis. For example, the cost per cubic metre of brickwork is worked out based on the required number of bricks, amount of sand and cement. The quantity of material required has been already computed and published in many books. These values can be adopted. The present cost of the materials can then be collected from the market. To this calculation, the cost of labour, water charges and contractor's profit are added. In this calculation the specifications of the materials assumed conform to the specifications furnished by the Bureau of Indian Standards.

Cost index is also used to compare the cost of construction during different periods. Cost index, helpful in comparing costs of construction during different periods, is defined as the ratio of the cost of structure under reference to the cost of an identical structure at a fixed place and time which is used as the standard for measuring the relative costs of structure at different places and periods. For example, if the cost index is assumed as 100 in 1965 and the index for the year 1980 is 340, it means that the cost of construction as on 1980 is 3.4 times more than the cost of construction in 1965 for identical specifications. The rise in cost index for 40 years shows that the cost of construction in 2006 is about 26.74 times more than the cost of construction in 1965.

In the case of construction costs, the labour component is only about 35 per cent of the total cost of construction. Basic services like plumbing, sanitary and electrical works account for another 30 per cent. The material costs constitute the remaining 35 per cent. The labour costs have steadily increased but the bulk of the rise comes from increase in material costs.

Ideal alternative

Given the rise in cost of living it will be unreasonable to reduce the cost of labour. Alternative materials and technologies is one way to reduce the construction costs. This will also be necessary if we have to seriously consider the environmental implications of booming construction works. More than the cost of construction it is the price of the land, which is critical in determining the affordability of housing.

When land and construction costs are compared, the increase in cost of construction during the period from 1981 to 2006 is about five times while the appreciation in cost of land for the same period is about 140 times.

From the above analysis, it is clear that the value of land is more significant in deciding the price of the property. The rise in land price is partly due to speculation and partly due to demand by competing uses. In the last decade, the private sector has contributed to the improvement of housing supply but it predominantly focus on higher income groups. This has also contributed to speculative buying and selling. What is required is a regulatory policy vis-a-vis land price and affordable housing, the promotion of alternative technologies and changes in Government policies such as reasonable imports of building materials and reduction in taxes.

(The author is former National President, Institution of Valuers)

Keywords: real estate