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?