What happens when the housing market heads for stagflation? Prices soar as inventory remains stagnant. This is the situation prevailing in Bangladesh's housing market, leading to headaches for both builders and buyers of apartments.
Prices of building materials have been rising since March last year after global supply disruptions caused by the Covid-19 pandemic.
Now the Russia-Ukraine war has made steel rods, cement and tiles even more costly.
As a result, completion and handover of apartments have almost stopped, new sales slowed and real estate companies are getting ready to hike rates – as much as 30% – to make up for the rising costs.
On 1 March, Jams Developments Ltd (JDL), one of the leading housing companies in the country, increased the price of per square foot of flats in its various apartment projects by Tk1,000 to Tk1,500.
JDL Chairman Md Shahadat Hossain Dabi said, "The rate at which the market price of housing materials has risen since the war started last month left us with no alternative but to raise prices."
"A key cost component is steel rods and the war has pushed up prices of rods by 10% a tonne. In the past two weeks, the prices of all kinds of building materials have gone up by 10% to 25%."
He said the cost hikes had led to a rise in the price per square foot of flats – an increase ranging from Tk800 to Tk1,000 for ordinary flats and from Tk2,000 to Tk3,000 for luxury flats.
Shahadat also said several projects are ongoing in different areas of Dhaka city including Gulshan, adding that the rate hike was determined by the quality of the flats and the location.
He said although work on three new apartment projects has been put on hold for the time being.
The company did not see any sales in March. According to the real estate trader, flats worth Tk100 crore were sold in January and February last year.
Manohar Hossain, president of the Bangladesh Auto Re-Rolling and Steel Mills Association, backed up Shahadat's concerns, saying the cost of importing scrap iron, the main raw material for steel rod, was earlier $435 per tonne, but since the war the price rose to $500.
Manohar Hossain said that if the war continued, prices may go up further.
Around the same time, Sheltech (Pvt) Ltd, the country's leading real estate business, also decided to increase the price of its flats.
Tanvir Ahmed, managing director, Sheltech (Pvt) Ltd, told The Business Standard that the market price of construction materials had risen by 35%-40% so far, alongside corporate costs so flat prices could also be increased.
Sheltech has already increased the price of flats in some areas, he said. Again, prices have not been increased depending on the quality of some areas and projects.
Tanvir Ahmed said construction work will be carried out in the new projects keeping in view the situation of international and domestic markets.
Economist Ahsan H Mansoor said due to the increase in the price of materials, the price of buildings will also go up. However, the flats that have been contracted earlier have to be handed over in time.
He also said if the situation continued, some 3.5 million construction workers risk losing their jobs.
In addition, new small and medium-sized residential establishments outside the capital will also be jeopardised.
Alamgir Shamsul Alamin, president of the Real Estate & Housing Association of Bangladesh (REHAB), told TBS that there was no alternative to raising the price of flats. The increase would, however, depend on the quality of the flat and the location.
"Housing companies have been advised to increase prices at a reasonable rate keeping in mind the customers," he said.
He said housing companies in the capital sold ordinary and luxury flats worth Tk5,000 crore on average per month last year and the year before. But in March, the sale had almost stopped. He mentioned that some companies had sold fewer flats.
No handover, little sales
In the Kalachandpur area of Gulshan, Comfort Housing Apartment project sold 18 apartments between June to December 2020.
By June last year, all the apartment owners had a transfer agreement. So far, however, no apartment owner has received their apartment.
Imroz Habib Russell, who works for a multinational company, bought an apartment in the Comfort housing project.
Speaking to The Business Standard, he said, "I made an agreement in November 2020 to buy a 1,550 square foot apartment for Tk1.3 crore. I paid Tk60 lakh as advance, the remaining to be paid by December last year."
He said when the developers were asked to hand over the apartment in June last year, they said that the construction work was being delayed due to an increase in the market price of construction materials.
Eighty percent of the building work has been done till now. Only 18 apartment owners of the project are in arrears.
Nazmul Haque Rony, managing director of Sign Bd Development Ltd – the company behind Comfort Housing – told TBS that at the time the apartments were sold in 2020, the flats were priced based on the market price of construction materials.
Since the beginning of last year, the market price of all types of construction materials, including rod and cement, has increased by about 50%. As a result, most of the project work has slowed down.
Prices shoot up
According to REHAB, about one lakh apartments and flats were sold in 2020. About Tk50,000 crore has been invested for the purchase of these apartments and flats.
About 1,20,000 apartments and flats were sold last year. About Tk60,000 crore has been invested for the purchase of these apartments and flats.
More than 50% of the flats and apartments sold in 2020 are yet to be handed over to buyers, a REHAB official said, while more than 60% of the flats and apartments sold in 2021 have not yet been handed over to buyers.
REHAB President Alamgir Shamsul Alamin told TBS that REHAB is in discussions with real estate traders about how to quickly hand over the sold apartments.
Negotiations are also underway with the government to regulate the construction materials market. A positive result will come soon, added the REHAB president.
REHAB Director Naimul Hassan said that in March last year, the market price of construction materials began to rise sharply. After a three-point increase, the price of rod stood at around Tk60,000 per tonne in January this year.
One week after the Ukraine turmoil on February 24, the price of rod has increased by Tk6,000 to Tk7,000 per tonne.
Manufacturers and importers of these construction materials say the war between Russia and Ukraine has disrupted shipping on various routes, including the Black Sea and the freight rates have shot up.
According to the rod manufacturers, most of the raw material for the rod came from Ukraine. As a result of the war, the sea route has been disrupted, hitting supplies, and thus, prices.
At the retail and wholesale shops in the city, the prices of cement of all the companies have gone up by Tk50 in the last two weeks.
The price of bricks and stones, the main building materials, has also risen following the Russia-Ukraine war.
Earlier, imported stone was sold at a maximum of Tk3,000 per tonne. During this period, the price of a ton of stone has increased by Tk1,000.
The price of bricks has also increased. Last January, the price per thousand bricks was Tk6,000-8,000, but it is currently Tk9,000-10,000.
Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, told TBS that the protracted Russia-Ukraine war would have a major impact on the housing sector.
In this situation only the rich can afford to buy flats or apartments, while there will be spillover effects on other sectors. The workers involved would also be greatly affected.
He said if the war is not long-term, real estate traders and buyers will gradually adjust to the current market price of construction materials over a period of time.
Bangladesh Institute of Planners (BIP) Former General Secretary Planner Dr Adil Muhammad Khan told TBS that the Ministry of Housing and Public Works is responsible for adjusting the prices of flats in different areas by adjusting the current market prices of construction materials.
Also, according to the private housing development policy, a flat must be handed over to the buyer within six months of the sale agreement.
The word "stagflation" has been appearing more frequently in Google Search trends since the launch of the Russian strike on Ukraine on 24 February, reflecting researchers' and economic policymakers' growing concerns over the future course of the economy.
Bloomberg's News Trends function, which tallies the occurrences of keywords in articles from more than 1,500 sources, illustrates how stagflation is pinging the world's radar.
The US housing market has already been in stagflation and showing conditions of the 1970s, according to a Bloomberg article.
The same condition prevails for Bangladesh's housing market as well.
Dr Zahid Hussain said if the price rally of construction materials continues, apartments would be costlier and homebuilders will get few buyers, which might lead to suspension of construction works. "In such a situation, there are fears that the housing sector may face stagflation," the economist said.