The effect of 106% inflation of construction materials on the housing market/ why the high cost of materials does not necessarily make the price of the house more expensive?

Referring to the 106% inflation of building materials in Tehran, a housing expert said: "Building materials make up about 15% of the total cost of housing, and to correct the pricing in this market, the historical cost must be taken into account."

The increase in the cost of building housing has become one of the main challenges of the construction market, according to the report of the Iranian Statistics Center, the inflation of construction materials in Tehran reached 106% in the spring of 1405. This increase in costs, along with the growth of human wages, the price of equipment and facilities, and the difficulty of financing, has affected the economic calculations of builders and increased the final cost of building residential units.

In the same context, Mehdi Zarkani, the secretary of the mass builders' association of Tehran province, has announced the cost of construction of economic and support projects, including plans related to the national housing movement, about 42 to 50 million tomans per square meter. According to him, this figure reaches around 65 to 70 million Tomans per square meter in conventional urban projects in Tehran with five to seven story buildings.

However, the increase in the cost of construction does not necessarily mean its direct impact on the increase in housing prices, and the extent of its impact on the market depends on other factors as well. The question is whether the inflation of construction materials will lead to an increase in housing prices in the coming months, or will the gap between the cost of construction and the selling price continue due to the influence of market conditions and pricing?

Referring to the effect of construction materials inflation on housing prices, Majid Gudarzi, an expert in the field of housing, said: "Unfortunately, in the construction market, pricing has little to do with the real cost components and production conditions, and in many cases, it is done arbitrarily and unprofessionally." This issue has faced serious problems in the construction industry and has caused almost all the stakeholders of this market to be under pressure.

He added: There is a significant gap between the cost of construction and the selling price of housing, and the pricing in this market is done practically without restrictions and effective supervision. For this reason, the increase in construction costs is not necessarily reflected in the final housing price in the same proportion, and it cannot be said that the 106% inflation of construction materials alone will lead to a similar increase in housing prices.

The share of construction materials from the total price of housing

Referring to the share of construction materials in the final cost of building residential units, Guderzi said: Estimates are that construction materials make up about 15% of the total cost of housing. Therefore, even if the price of this group of inputs faces a significant increase, its effect cannot be equated directly with the inflation of the entire housing market.

He continued: "Housing is a necessary commodity and the demand for it will not disappear easily." In many countries, due to this feature, the housing market is directly or indirectly under supervision and control. But in our country, despite the interventions and controls that are carried out in different sectors of the economy, the housing market does not have an effective and appropriate mechanism to monitor pricing.

Stating that the current conditions have put a lot of pressure on the industry's activists, this housing expert said: We hope the government will address this situation by implementing laws and creating appropriate monitoring mechanisms. Inflation of more than 100% in construction inputs, especially when it is not accompanied by a proportional increase in household income and purchasing power, creates difficult conditions for producers and consumers.

Unfortunately, in the construction market, pricing has little to do with the real cost components and production conditions, and in many cases, it is done arbitrarily and unprofessionally.

Pricing domestic materials with global standards

Criticizing the way some construction materials are priced, Guderzi stated: an important part of the materials used in construction are produced inside the country and their production cost is mostly Rials. However, in some cases, the selling price of these products to the public is determined by dollar criteria and world market prices. While there is no direct relationship between the cost of domestic production of some of these materials, such as gravel, sand and concrete, with the dollar rate.

He added: This duality has become one of the serious problems of the construction industry. When materials are produced with domestic costs and Rial wages, but their selling price is determined according to other criteria, the cost of construction is far from the economic power of households and even the actual conditions of production.

Referring to the salary situation of the labor force, this expert in the field of housing said: A worker who works in housing construction with a salary of riyals, neither has a role in determining the final price of the property, nor can he compensate for the increase in the price of housing in proportion to his living expenses. In such a situation, production costs and sales prices are far from each other, and the pressure of this situation is imposed on both the builders and the applicants for housing purchase.

The necessity of monitoring the pricing and calculating the cost price

Gudarzi identified the lack of sufficient monitoring of pricing as one of the factors that exacerbated the problems of the housing market and said: "Weak monitoring has caused some sellers of construction materials and real estate market activists to use political risks and special economic conditions to increase prices." As a result, prices are not necessarily determined based on actual cost of production and cost.

Emphasizing the necessity of reforming the pricing mechanism, he stated: Our proposal was to consider the historical cost price in calculations and pricing so that the prices are not moved solely under the influence of temporary conditions and political risks. It cannot be accepted that a property that was built years ago, regardless of the actual cost of its construction, will face a disproportionate price increase just because of new developments.

This housing expert continued: The main problem is the lack of a clear and monitorable framework for setting prices. If the production is done inside the country with Rial costs, the ratio between the production cost and the selling price should also be transparent. It is not possible to consider the production costs in Rials, but to determine the selling price with dollar criteria regardless of the domestic conditions and purchasing power of households.

Decrease in purchasing power and decrease in attractiveness of investing in housing

Referring to the consequences of this situation for the housing market, Godarzi said: the increase in prices in a situation where the wages and purchasing power of households do not grow in proportion to it, causes housing to gradually become out of the reach of a larger part of the society. On the other hand, builders also face increased production costs and sales difficulties, and this issue can make the activity in the construction industry more challenging.

He added: "The housing market can have more stable conditions when the prices are determined based on economic components, the real cost of production and specific criteria." In the current situation, the suppression of wages, the reduction of purchasing power, and the non-expert pricing have caused the balance between the cost of construction, the selling price, and the financial ability of the applicants to disappear.

In the end, this expert in the field of housing emphasized: the increase in the cost of construction materials cannot be considered the only determining factor of the future housing inflation. As long as the pricing mechanism is not corrected and there is no effective monitoring of the market, even the reduction or stabilization of some production costs will not necessarily lead to the improvement of the market situation and increasing the access of households to housing.