For much of the past two years, Sri Lanka’s property market has been spoken about in extremes. On one end are headlines declaring Colombo the most unaffordable city in the world to buy a home. On the other are confident assertions that real estate has emerged as one of the economy’s clearest post-crisis recovery stories. Both are true, and the uncomfortable reality is that they are true at the same time.
According to the latest Property Prices Index compiled by Numbeo, Colombo now ranks first globally for housing unaffordability. The city’s price-to-income ratio stands at 55.3, which means the average property costs more than 55 times the average annual income.
In practical terms, that places Colombo ahead of cities long synonymous with extreme housing stress, including Hong Kong, Shanghai, Mumbai, and Singapore. Mortgage payments, Numbeo estimates, amount to nearly 774% of annual income, while the affordability index hovers close to zero, signalling that homeownership is functionally out of reach for the average resident.
Yet behind these stark figures is a market that has, by most conventional measures, recovered decisively from crisis. Property prices are rising again. Construction sites that fell silent in 2022 are active. Investors who exited during the downturn are returning. Land values, especially in and around Colombo, are climbing at double-digit rates.
From collapse to comeback
To understand today’s property dynamics, it is necessary to revisit the shock of 2022. As Sri Lanka’s balance-of-payments crisis spiralled into a full-blown economic collapse, interest rates surged, liquidity dried up, and consumer confidence evaporated. Property transactions slowed sharply. Prices, particularly in urban markets, fell.
“Compared to 2022, when we saw a price decrease of around 10%, from 2023 onwards there has been a continuous upward trend in the property market,” said Lanka Property Web Senior Manager – Research and Analytics Chamara Thewarapperuma.
That reversal, he explained, had been closely tied to macroeconomic stabilisation under the International Monetary Fund (IMF)-supported reform programme. Inflation has eased, the currency has stabilised, and most critically for property, borrowing costs have declined sharply.
“Currently, most housing loans are in the range of 9–10%, which makes borrowing more affordable. Based on this, the market has reactivated after the crisis,” Thewarapperuma said.
At the same time, the investment calculus has shifted. Fixed deposit rates, which peaked near 25% during the crisis, have fallen to about 7–8%. For savers accustomed to double-digit returns on risk-free instruments, real estate has once again become attractive.
“Because of this, people are withdrawing money from fixed deposits and investing it in the real estate market,” Thewarapperuma said. “From an investment perspective, real estate activity is happening mainly because of low interest rates. Investors are now looking at real estate as an alternative to fixed deposits.”
What CBSL numbers reveal
Official data from the Central Bank of Sri Lanka (CBSL) reinforce this narrative of recovery.
The Land Valuation Indicator (LVI), compiled by the CBSL using valuation data from the Government Valuation Department, shows that land prices in the Colombo District increased by 11.4% year-on-year in the first half of 2025. Residential land values rose even faster, by 14.4%, while commercial and industrial land prices increased by 11.5% and 8.4%, respectively.
The semi-annual momentum is equally striking. Compared to the second half of 2024, land values rose by 8.3% in just six months, signalling that price pressures remain active rather than tapering off. Importantly, this growth is not confined to luxury segments. Residential land, which underpins housing affordability for households, has been the strongest driver of overall land price inflation.
These increases have direct implications for developers and investors. Rising land values support balance sheets, revive stalled projects, and improve the viability of new construction. But for households without assets, rising land prices function as a moving goalpost.
The geography of growth
One of the most notable features of Sri Lanka’s current property cycle is where price growth is occurring. While Colombo remains the focal point of attention, some of the strongest increases are happening outside the city’s municipal boundaries.
“Most suburban locations are more affordable, and people are looking for quieter and calmer environments,” Thewarapperuma said. “Because of this shift, we are seeing stronger price increases in suburban areas compared to Colombo city limits.”
In districts such as Gampaha, Lanka Property Web’s land price index points to annual price growth of around 15%. Kalutara has also recorded strong gains. For investors, these areas offer a combination of lower entry prices and faster appreciation.
“If someone purchases a land plot in these areas at an affordable price, they can gain additional value within one year. If they are able to hold that land for 10–15 years, they will see significant benefits,” Thewarapperuma said.
Apartments, rentals, and the limits of yield
Apartments occupy a more complex position in this situation. Colombo remains the preferred location for apartment investments, particularly among buyers seeking rental income rather than owner occupation. Multiple budget ranges now exist and investors with stable income sources are re-entering the market.
Yet the numbers suggest that rental returns have not kept pace with capital values. Numbeo estimates gross rental yields of just under 3% in Colombo’s city centre and around 3.6% outside the centre. Lanka Property Web places average rental yields slightly higher, at around 4–5% annually, but even these returns remain modest relative to property prices.
This gap between prices and rents has contributed to a surge in demand for renting rather than buying. “Because prices in Colombo and some suburbs have increased, we see people either moving slightly away from the city or choosing to rent instead of purchasing,” Thewarapperuma said. “The rental market has picked up over the past two to three years because renting is more affordable.”
For households earning the average monthly net salary of around Rs. 70,000, as estimated by Numbeo, the arithmetic is unforgiving. Apartment prices exceeding Rs. 1.1 million per square metre in central Colombo place ownership firmly out of reach, even with lower interest rates.
Is SL really ‘overpriced’?
“There was an article distributed widely saying Sri Lanka has become overpriced, but that is largely centred on Colombo,” said Capital Trust Properties CEO Minoli Wickramasinghe. “If there is an inflow of foreigners, they will all end up renting in Colombo because we are not infrastructure-ready in the rest of the island.”
In her view, the affordability crisis is as much a planning failure as a pricing one. Development approvals, she argued, had been concentrated in areas already under strain, without corresponding investment in infrastructure elsewhere.
“You cannot give approvals for developments to just pop up without infrastructure being in place,” she said. “The result is that one area becomes overcrowded and expensive, and locals feel priced out, while the rest of the country does not see the same price growth.”
Wickramasinghe also warned that suppressing price growth entirely would carry its own risks. “If yields are not improving and capital appreciation is absent, who is going to invest in Sri Lanka?” she asked. “Our prices need to appreciate over time. We are still about a decade behind many other countries.”
A structural problem, decades in the making
For macroeconomists, Colombo’s housing dilemma is due to long-term structural constraints.
“On a per capita basis, Colombo’s pricing has historically been comparable to cities like Sydney or Singapore,” said Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe. “That is not what you would normally expect Colombo to be compared to.”
He acknowledged that some international rankings may have overstated the problem by mixing data from different years, but argued that the core message remained valid. Colombo’s land supply is exceptionally limited and demand has been concentrated into a very small geographic area.
There is also a cultural dimension. Sri Lanka’s long-standing preference for owning land and building houses has shaped urban growth over decades. As central areas became unaffordable, development moved outward in waves – first south, then east, and more recently north. Many of these accessible zones are now built up.
“In most parts of the world, the next step is mid-rise apartments for middle-income households,” Damsinghe said. “Colombo simply has not built enough of that kind of housing.”
Policy distortions have compounded the issue. Past government interventions, including subsidised credit, controlled exchange rates, and public sector wage growth, encouraged construction even when affordability fundamentals were weak. Correcting those distortions, Damsinghe said, would take time.
“You are trying to undo decisions made over 60 or 70 years within a very short period,” he said. “That mismatch is why we are seeing volatility in housing prices now, and it is likely to continue for a few more years.”
Growth, inequality, and what is to come
Most analysts agree that property prices are likely to keep rising, but not at the explosive pace seen in earlier cycles. Thewarapperuma expects moderate increases that support industry growth and employment without triggering another speculative surge.
That balance, however, will be difficult to achieve. Rising land values strengthen balance sheets and attract investment, but they also entrench inequality between asset owners and wage earners. Without expanded infrastructure, diversified housing options, and more inclusive urban planning, affordability pressures are unlikely to ease.
The property market today indicates recovery, confidence, and capital returning after the crisis, but unfortunately, it also tells a story of exclusion, where homeownership in the country’s economic centre has become a privilege.
