It now costs more to build than buy

Homebuyers may now find it more prudent to buy an existing residential property than build a new one from scratch, given the on-going rise in building costs.

Latest figures from Absa and FNB reveal that building a residential house from scratch can set you back about 30% more – or an average of R629 500 in rand terms –  than buying an existing one. This cost gap between the two homeownership options is significant, as it’s the largest recorded since 2003.

Absa’s home loans property analyst Jacques du Toit, says soaring building and vacant land costs, and house price growth that is barely keeping up with inflation, are the reasons behind the ballooning cost gap.

The average nominal price (before inflation is stripped out) of a new house increased to R2.02 million while an existing home of the same size increased to R1.39 million, according to Absa’s figures for the third quarter of 2016. Du Toit says the price trends on new and existing homes infers that it’s 31.2% – or about R629 5000 – cheaper to have bought an existing home than to build it from scratch.

FNB’s data also shows a similar trend, with the replacement cost gap of a home in the fourth quarter of 2016 increasing to 30.4%, which is well above the 21% recorded between 2014 and 2015 (see graph below).

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Source: FNB

The replacement cost gap is usually used by property valuation experts for insurance purposes to determine the cost (excluding land values) to rebuild a home from scratch if, for example, it was burnt to the ground.

The last time the cost of building a new home and buying an existing one were roughly the same, was in 2007 when house prices grew at double-digit levels and the home building boom was in full swing. Back then, says FNB property strategist John Loos, it was easier for property developers to roll out residential properties to the market given reasonable building costs. “It’s now increasingly difficult for developers to bring competitively priced new stock to the market and it’s reflecting in the building activity, which is not shooting the lights out.”

Underscoring this is the 1.39 million square metres of residential space that was completed in the three months to November 2016, compared with the 2.70 million square metres completed in the three months to December 2005, according to FNB.

Building costs and house prices

At the same time, building costs continue to soar, with Absa’s data showing that the average building cost of new housing, constructed in January to November 2016, increased by 6.4% year-on-year to an average of R6 539/square metre compared with R6 148/square metre during the same period in 2015.

Regional data does not specify where exactly it is more expensive to build a home. However, Loos says building costs (such as material, concrete and rubble removal) vary from area to area. “Sometimes building costs are determined by home values too. If existing home prices in the Western Cape were a lot higher than somewhere else, you’d probably find that the building sector could charge more for building a new home than where properties are a lot cheaper.”

Another benefit for opting to buy an existing home is the discounts that can be achieved due to falling house prices. National house prices (in nominal terms) in 2016 rose by 5%, which is slower than the 7.2% and 6.5% for 2014 and 2015 respectively.

Expect more of the same in 2017, as house prices will remain in the low single digits due to the poor state of the economy. Jawitz Properties’ CEO Herschel Jawitz expects house prices to accelerate by 5% to 6% in nominal terms in 2017. He adds that in real terms (with inflation stripped out), house prices “will break even or marginally decline, depending on where inflation ends up”.

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