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It costs R629 500 more to build a house than to buy one

Cost gap between building and buying is the largest since 2003.

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 –  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).

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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#BuildingPricesMustFall

Seriously we need more construction my PPC shares are plat.

But have the transfer costs (ie tax on acquisition) relating to the acquisition of an existing home being factored into this calc? Transfer costs are high – on a R5 mill home, about R500k = lost money. This amount just about bridges the gap between buy to build or just buy existing property. Some may argue that it is better to buy vacant land and build exactly what you want (i.e give the transfer costs to the builder), than buy an existing property which will inevitably not be what you wanted

What about the tax when building? Just because it’s included in the price doesn’t mean it doesn’t exist. New houses include 14% VAT. Also, the extra costs for building for R5 million will be proportionately more than for the example used in the article.

Surely if this was the case, then all residential development would stop as developers would be losing cash hand over fist.

It’s all a lie. you can build a 300sqr house for R600 000 cash on a piece of 500sqr land(costing R600000) in Sandton. But for R1.2m in Sandton you cant even get a toilet.

Hi FNB, in light of your above admission that there is a 30% cost gap, can you please explain to your customers why you require them to insure at replacement value. I was forced to insure my house bought 2nd hand 2 years ago for a value 26% higher than purchase price. Every year since I have had to fight with FNB to keep the (already inflated) value the same, as they keep insisting that the value must increase to reflect increased building costs.
My argument is as follows: say my house is worth R2M and the outstanding bond is R1.5M, but replacement value is R2.5M. If I insure for R2M and the house is completely destroyed, I can use my R2M insurance payout, pay off the R1.5M bond, sell the stand (lets say the absolute worst case scenario is that the value of the stand and demolition cost of what remains cancel each other out- but I am sure there will be a profit), buy my neighbour’s identical house for R2M market value. Finance it with the R500K I have left from insurance and a new R1.5M bond. How is the bank worse off in this scenario.

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