Affordable Housing Crisis Intensifies as Construction Costs Soar 40%
India’s affordable housing sector is facing a significant setback as construction costs have surged by 40% over the past five years, leading to a dramatic decline in new supply and sales.
Affordable HousingConstruction CostsReal EstateIndiaHousing MarketReal EstateAug 19, 2025
The squeeze on affordable housing is a direct result of a 40% increase in construction costs over the last five years, with the most significant escalation occurring after 2021. Dr. Prashant Thakur, Executive Director & Head – Research & Advisory at ANAROCK Group, explains, “The rise has been especially brutal since 2021, due to inflation, supply chain disruptions, higher demand for infrastructure, global macro shocks, and evolving government policy.”
Cost Drivers: Materials, Labour & Approvals
Several factors are driving the increase in construction costs:
- Raw Materials: Cement prices have corrected by 15% in the last year but are still up 30-57% over five years. Steel prices rose just 1% in 2024 but have climbed nearly 50% since 2019. Copper and aluminium have seen even more significant increases, with copper up 91% in five years.
- Labour: Labour costs have seen the steepest climb, increasing by 25% in just one year and 150% since 2019.
- Other Costs: Higher logistics (fuel), compliance, and approval charges have further burdened budgets.
City-wise Cost Variations (2025 Estimates, INR/sq. ft)
- Mumbai: Affordable housing costs ₹2,500–4,500 per sq. ft, mid-segment ₹3,500–5,000, and luxury ₹5,000+.
- Delhi NCR: Affordable housing ranges from ₹2,000–3,500 per sq. ft, mid-segment ₹3,000–4,500, and luxury ₹4,500+.
- Bangalore: Affordable homes are priced at ₹1,800–3,200 per sq. ft, mid-segment ₹2,800–4,000, and luxury above ₹4,500.
- Tier-2 Cities like Kolkata: Affordable homes start at ₹1,500 per sq. ft, while luxury homes top ₹4,000.
Even small cost hikes can have a significant impact on demand. A rise of ₹500–800 per sq. ft adds ₹5–6 lakh, often derailing homeownership plans for price-sensitive buyers.
Developer Strategies & Buyer Impact
Developers are employing various strategies to manage rising costs:
- Passing on Costs: Most developers transfer 5–6% of rising costs to buyers through escalation clauses in builder-buyer agreements.
- Margin Squeeze: Small affordable-housing developers face thin margins and are slowing launches or cutting amenities. Large and luxury-focused developers can absorb hikes due to stronger brands and higher margins.
- Price Impact: Residential prices have risen 9–12% annually in metros, driven by both construction and land costs.
Affordable vs Mid vs Luxury
- Affordable Housing: The hardest hit, with stalled sales and vanishing supply share.
- Mid-Range: Buyers are stretched but can still absorb some hikes.
- Luxury: Least impacted, as buyers seek exclusivity and can bear higher costs.
Tariff Threat Adds to Woes
If tariffs of 25–50% on imports like steel, aluminium, and finishes are imposed, construction costs could increase by another 1.5–5%:
- 25% Tariff: 1.5–2.5% rise in costs.
- 50% Tariff: 5%+ rise, especially in luxury and commercial projects.
- Impacts: Developers may delay projects, affordable buyers could be priced out further, and supply chains may be disrupted.
GST Reform — A Silver Lining?
The government’s proposed GST reforms, including a shift to a two-rate structure (5% and 18%) and reducing GST on cement from 28% to 18%, could provide some relief:
- Affordable Housing: Prices could dip 2–4% if input tax credits (ITC) are restored.
- Mid-Segment: A cut from 5% to 3% could trim prices by 2–3%.
- Luxury: Limited benefit, as imported high-end finishes may fall under the proposed 40% sin rate.
The housing affordability crisis is intensifying. With affordable supply dwindling and construction costs showing no signs of stabilising, policymakers face growing pressure to intervene. Incentives for developers, local sourcing strategies, and faster regulatory approvals could be critical to reviving the affordable housing dream.
“Affordable housing is facing its toughest challenge in a decade. Without policy support – whether through GST rationalisation, tariff relief, or labour reforms – the segment risks further marginalisation,” Dr. Thakur cautioned.
Frequently Asked Questions
What is the primary reason for the decline in affordable housing supply?
The primary reason for the decline in affordable housing supply is the significant increase in construction costs, which have risen by 40% over the past five years.
How have raw material prices changed over the past five years?
Cement prices have increased by 30-57% over five years, steel prices have climbed nearly 50% since 2019, and copper prices have surged by 91% in the same period.
What are the main strategies developers are using to manage rising costs?
Developers are passing on 5-6% of rising costs to buyers through escalation clauses, facing margin squeezes, and sometimes slowing launches or cutting amenities.
How might proposed GST reforms impact affordable housing prices?
If input tax credits (ITC) are restored, affordable housing prices could dip by 2-4% under the proposed GST reforms.
What are the potential impacts of imposing tariffs on construction materials?
Imposing tariffs of 25-50% on imports like steel and aluminium could increase construction costs by 1.5-5%, leading to delays in projects and further pricing out affordable buyers.
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