Gap between buying and building a home widens

Published Feb 7, 2012

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The price gap between new and existing homes has widened to a new record level after starting to decline last year.

A recovery in the residential building market is unlikely until the price gap between new and existing houses narrows. This is because better value for money purchases are available on existing homes than in the new house market. The latest Absa housing review reveals it was 34.5 percent cheaper in the fourth quarter to buy an existing house than to have a new home built.

The price gap between new and existing houses hit a record high of 33.8 percent in the fourth quarter of 2010. It subsequently declined to 32.5 percent in the first quarter of last year, 29.7 percent in the second quarter and 29.4 percent in the third quarter.

Jacques du Toit, a senior property analyst at Absa, previously said the price gap would have to halve from its 33.8 percent peak before it stimulated a significant building revival.

During the 2011 calendar year, it was 31.6 percent, or R478 600, cheaper to buy a house than to have a new one built.

This was based on the cost of building a middle segment home, increasing by a nominal 5.3 percent last year compared with 8 percent in 2010.

This increase in building costs meant the average nominal price of a new middle-segment house increased by a nominal 6.6 percent to about R1 516 400 last year, translating into real price growth of 1.5 percent in the past year.

By contrast, the average price of an existing house was about R1 037 800 last year, up 1.8 percent in nominal terms but declining by 3.1 percent in real terms compared with 2010.

Du Toit said factors affecting building costs and eventually the price of new housing included material, equipment, transport, labour, developer and contractor profit margins, and the cost of developing land for residential purposes.

He said the cost of developing land was affected by aspects such as scarcity, the availability of services, the cost of rezoning, and the demolition of old and unwanted structures.

Property economist Erwin Rode said last month that house prices in South Africa were still at least 25 percent overvalued, which implied a downward adjustment in real house prices was inevitable with only the timing and speed of the decline in question.

Rode’s estimate of overvaluation was based on the price level suggested by the trend line over the past 44 years.

Rode did not believe there would be a catastrophic market crash, but a gradual decline in real house prices, adding a reduction in real house prices did not necessarily mean nominal house prices would fall.

Du Toit said Absa’s expectation was that nominal house price growth would be low this year and next year.

John Loos, a household and property sector strategist at First National Bank (FNB), believed urbanisation in South Africa should bring about significant long-term increases in real property values.

Loos said FNB’s indicators of demand versus supply still pointed to an unrealistically priced market. How far the real house price declined would depend on South Africa’s ability to turn the economy around. - Roy Cokayne

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