REHDA: Rising cost of construction will deter new developments
Home development cost versus selling price equation
If the price of land moves up, cost of construction materials move up and the salary of skilled workers move up then the price of the property will have to move up too. What happens if the price is already very high and cannot be moved upwards anymore? The developer may stop building or they buy cheaper land, they reduce the quality of materials or they try to reduce the cost from workers through automation. They could also get approval to build more homes; higher density so that the price is lowered as there are more units within the same piece of land.
Real Estate and Housing Developers’ Association (Rehda) Malaysia on the cost of construction
Article in nst.com.my President of REHDA (Malaysia) said that the additional costs in the real estate sector brought on by sharp increases in building materials, labour costs, and redundant policies imposed on the industry may be too punitive for development projects to become economically viable. He shared that the Rehda Property Industry Study for the second half of 2022 revealed an average annual increase in building expenses of 17 per cent as well as a more than 20 per cent increase in the average price of cement, steel, aluminium, and bricks.
He said, “I am sure developers would agree with me that undertaking development in Malaysia is not as straightforward as the industry is highly regulated by over 50 laws.” Tong also said that the private sector housing development in Malaysia was not limited to the mere provision of building houses, but covered a wide range of criteria, including the supply of infrastructure and amenities, effective maintenance and management, particularly for strata schemes, a priority on safety, and the promotion of communal life. Please read the full article in nst here.
Location, Distance, Size and Price
When home price moved up faster than salary growth, it has to be controlled. Else, no property developer would build because they would not be able to sell them. What happens next is the decision to buy land parcels further away from popular areas. These land parcels would be cheaper as the distance is further away from established neighbourhoods.
Second thing which will happen is the size reduction. By building smaller units, the property developer could build more units. The cost per unit is reduced and the price could be lowered too. For example, instead of 1,200 sq ft high-rise unit, if developers were to build 850 sq ft ones the total price would be lower.
For landed properties, instead of 22 x 75 lots, if they build 18 x 75 lots instead, then developer would be able to build more landed units. 22 ft width x 20 units = 440 ft. With the same width of 440 ft, if it’s a 18ft unit, then total units which could be built would be 24 units. This is why the price could then be lowered.
Buyers would have to manage their expectation. Given a choice, everyone would definitely prefer to buy within the city centre or next to a mall or even nearby a MRT station. However, when these become too expensive due to demand, they would have to be willing to fork out more or they could choose other cheaper properties instead. Else, they could also choose to rent first while waiting for prices to stabilise. It’s hard to say for sure which is right or wrong in the short term. In the longer term, it’s still best to own a unit versus helping owners to pay for their property via rental.
Property News Malaysia? Sign up for daily investment news updates (FREE since Nov 2013 and FOREVER). Alternatively, Follow me on Telegram here.
Next suggested article: It’s not an investment if we know nothing about it