Never before has the cost of buying a new house been so much more expensive than the price of buying an existing one. At the end of Q4 2010, a new house was 51% more expensive than an existing house!
Perhaps this is what is driving the low confidence in the building industry as per this article: http://www.iolproperty.co.za/roller/news/entry/building_confidence_at_low_point
How can builders continue to be confident when they are faced with this level of competition? And what is worse news for them, prices of existing houses look like they might be dropping further. This will serve to increase the gap even more.
So how can these two curves be brought closer together? If you look back at history, since the 90’s there has been a consistently large gap between the two. Now, one can understand there will always be a certain premium on a new house which is worth paying for the lower future maintenance costs and the nice new fittings. But is a 51% premium really sustainable?
Depending on your viewpoint there are two approaches to this. There are those that use this information to prove that existing houses are still undervalued and that another housing boom is on its way. Rationale:– existing houses prices need to catch up to new house prices.
But this is impossible given all the data already published wrt household affordability, debt to income ratios and employment prospects in South Africa. Sure, there is indeed a gap, but where is the money coming from to bridge that gap by consumers spending more on housing?
If nominal house prices dip further as is expected, this 51% premium is set to increase even more. We have already seen that happen in the last two quarters of last year, where nominal house prices dipped, but new houses rose even further.
On the other hand, can house builders find savings to drop their prices? Is it likely that the price of cement and bricks will go down when they are actually rising? Is it likely that the cost of labour will go down when living costs are increasing? Are cheaper products going to be used in the new houses that are built – if so what are these products?
Only a mass move by builders to build affordable housing between R500k and R1m will close this gap by bringing the average price of new houses down. Alternatively, it’s a very long wait for nominal prices to start to rise. However, builders are loathe to build at this entry level price because it is less profitable and requires very close attention to costs and workmanship.
The question is, do they have a choice anymore?
New v existing house prices in South Africa
Awesome. I’ve been looking for this data. I work in the building industry as an engineer and I see a definite shift from new builds to renovations, alterations and extensions. Its not all doom and gloom, people in the industry just need to shift their focus a bit.
Is this graph making sense ? The further the red and the blue line are apart should govern the black line, yet I am not seeing that. For example, from March 1980 to July 87, the red new house price is exactly the same as the blue existing house price, yet the black line is showing the difference between them goes from 35% to -10% over the same period … Huh ? Am I missing something here …
It might also be interesting to make the new house graph into a real one.
How about creating a graph to see real land prices as well.
In 2001 both new and existing houses veered up from their long term trend. We know existing houses went into bubble mode. Why did new houses go into an even bigger bubble. Is it the land prices ? Obviously, in a crash, land also crashes. If there is no fat in building costs then is land where the fat is ?
If the consistent new house trend from 1980 to 2001 had continued, new houses would be significantly lower presently.
Why did new building costs rocket so much in late 2007 ? Was it the end of bubble greed or the World Cup greed ?
Is there a real graph showing building costs per square meter ? That might be interesting to get insight into what is going on. Has building costs gone up faster than inflation ?
So many questions to try and figure this one out. That 50% difference has to come down. I can’t see existing houses going up in value to meet new houses so new houses will have to be the one to move down. How can that happen ? Will it have to be land costs coming down ?
Interesting one this … we need more graphs !!!
Fair shout CJ, the detail is unfortunately lost in the scale of the chart and the thickness of the lines.
I have published the actual price time series here:
At the end of Q1 1980, new houses were 35.8% more expensive than existing.
At the end of Q3 1986, new houses were 10.9% cheaper than existing.
Yes those are a lot of questions! I don’t have land costs to hand but will have a look around. Yes I guess price relief could come through falling land prices.
Thanks – maybe add the inflation numbers to those and graph it to show whats happening with new houses in real terms – might be interesting.
Moderator – you have lost the blog tab – I am only here because I have bookmarked it – people coming to the main site can’t find it !!!
Thanks for letting me know CJ, I have been playing with the layout. It should be there now?
9am tuesday – can’t see it
Did you have it under “articles”? All the blog articles are now under “discussion” if you click “discussion”.
the address is http://housepricesouthafrica.com/blog-2/
Is it still a problem on your side?
OK – I see where it is – it is not on the drop down menu and people are not going to know they need to click “discussions” – you probably need the Blog in the menu – or have another tab with blog.
No point having a blog if people can’t find it – notice no one has commented recently – that’s because you have hidden yourself !!
If I am struggling as a regular, anyone new doesn’t stand a chance.
Thanks for all the feedback CJ! Have changed it back to “blog”, but still have the drop-downs to help readers navigate to particular topics. This easier to navigate now?
Hi there,
I do not know anything with regard to building costs etc. but just as many other working South Africans, I find myself been excluded from the property market because of my low income. I have an opportunity to purchase a plot of vacant land, in a not so bad area , unfortunetly, the bank will only consider a bond thereon for 50% of the cost and insists that building should start not longer than 6 months after registration of the land. If I cannot afford to buy a suitable existing house (standard 3 bedroom house) would it be cheaper just to build a new house on this plot? bearing in mind the cost of building right now…..please advice?
The cost to build a new house generally exceeds the cost to buy an existing one. The second to last graph under the “graphs” tab shows this. I would be very careful about buying land and then building.
Hi there
Has anyone recently looked at the existing house price`s in Ellisras? and the vacant land price`s as well. There is more affordability to buy a vacant land carry all the cost and to build a new house. Due to the recent development in Ellisras, home owners decided to rent out there existing houses 3 three time`s the value of the house. Or even the selling price is more.
Q; Is it the area what makes it expensive to buy, the sudden new development in the area?
Q: why in this case is it more affordabil to build a house from scratch?
regards
Hi we are a family with 3 kids, want to sell our house in Holland and are thinking of buying in port elizabeth or jeffreys bay and would like to know if there are big old buildings that need repairs for a cheap price. I can do elektrics, water, tiles, and more. Maybe there is even someone interested in joining in to combine the possibilities. We want to find a building with enough space for living and business. The cheaper and bigger the building and property is the more I would be ready to do. Greats Mike & Mona & Kids
I believe the building industry with there high margins are responsible for the higher cost in Housing.
The Builders left no margin for owners together with estate agents fees [ one of the highest in the World.So maybe we are going back to where the pricing should be !!
HI
Mayb someone can help me , we bought a 2 bedroom house and wanted to add on two bedrooms each with an en suite. This extension was into the existing garage so ther was no foundation necessary but we needed to make an arch or entrance into the garage. the builder needed to divide the area into two rooms and add walls in each room for the bathrooms. the one room which is the main bedroom had another wall built for a walk in closet. The exterior walls needed an extra line of bricks to make it a double wall. thats about 55 metres of wall to ceiling height. more or less how much can i expect to pay for labour.I am so confused because the builders i spoke to sound either too cheap or too expensive, some are quoting between 1000 and 800.00 a metre and others between 400-500 rands a metre. i dont know anything about building so i dont want to get caught. what should i reasonably expect to pay for the work i mentioned aboved. just building the walls and plastering ,
As a contractor, I find this interesting, however the discussion avoids one rather important point : the cost of renovation! The cost of renovation of an average 3 bed house is about R1m. To renovate a bathroom is about R60 000. A kitchen will cost about R100 000. To replace windows and doors with aluminium is about R250 000. To build a boundary wall is about R2500 per linear meter.
If you add the renovation cost then there will be little difference between the ‘new build’ and the existing house, however this point has been ignored.
Chris , you are missing the point – any Tom ,Dick or Harry can build – it’s a piece of cake (that’s why you see so many of them actually doing it themselves , mixing mortar , elbow grease and all) , you see , it’s much easier not renovating the house and spending that same 1 mil or so on a fat new 4 by 4 that loses value from day one!Now that’s what I call clever Trevor!
Thanks Gunter, 51% of the worlds population is female – they are not interested in labouring in the hot sun or trying to master plumbing or electrics. Although it is possible for men to build a house, I see very few doing this, it is simply too much like hard work and most of the folks who can afford a house believe that it is better to earn the money and pay someone else to do the work. Few money lending facilities (banks) will lend money to an owner/builder and most ask for an NHBRC registered builder. Should you be laying a few bricks then I agree that anybody can do this, however I do not know many young people who will tackle a roof (and get it right) or plaster a wall to an acceptable standard. Most DIYers are very proud of their work however the banks view this differently. When you come to sell the house, the purchaser will price in the DIY and you will probably not profit from your work.