Existing Homes Trump New

Private Property South Africa

The recent release of Absa’s Third Quarter Housing Review didn’t do much to fan the fires of South Africa’s already distressed residential construction industry.

According to the report, it was R528 100 or 34.4 percent cheaper to buy an existing house than to have a new one built in the second quarter of 2012. This is due to the fact that the cost of having a new house built increased by 4.3 percent year on year in the second quarter of 2012, after rising by 4.8 percent year on year in the first quarter of the year.

The report stated that the average price of a new house stood at about R1 534 600 in the second quarter of the year. In real terms, the price of a new house dropped by 1.1 percent in this quarter. However, the average nominal price of an existing house simultaneously dropped by 3.2 percent year on year to approximately R1 006 500 in the second quarter, translating into a real decline of 8.5 percent and the R528 100 difference between new and existing properties.

According to the report, a number of factors are driving the costs of new house prices. These include:

• The cost of serviced, developed land

• Costs relating to planning and construction phases such as professional and consulting fees with regards to rezoning, the drafting and approval of building plans, structure design and site inspections

• The cost of development finance

• The cost of preparing land for construction

• The cost of providing infrastructure such as roads, electricity, water and sewerage installations

• The cost of building materials

• Equipment, transport and labour costs

• Developer and contractor profit margins

Commenting on the previous housing review, Jacques du Toit, a senior property analyst at Absa reportedly said that the gap between the average price of a new house compared with that of an existing house had been on an upward trend over the past few quarters and was unlikely to come down in the near future.

Interestingly, the report appears to closely reflect international construction trends. According to the annual International Construction Costs Report released by global built asset consultancy EC Harris, construction costs in the Asia-Pacific region, North America and parts of the Middle East are on the rise and fast catching up with prices in Western and Northern Europe. The study (which measures building costs in 53 countries around the world) found that construction costs act as a reliable indicator for global economic trends.

Locally, the report cites economic growth, employment, inflation, interest rates, household income and debt, the state of consumer credit records and consumer confidence as key factors of the housing market. The report adds that these factors will impact the affordability of property and accessibility of mortgage finance against the background of trends in property prices, property running costs, financing and transaction costs and banks’ lending criteria.

As a result of these factors, the report reckons the housing market will continue to show a relatively subdued performance in respect of house price growth for the rest of 2012 and in 2013. Additionally, based on Absa’s calculations, the report states that prices will probably continue to deflate in real terms over the next 6 to 18 months.

Given this scenario, it’s likely that house size trends will come under pressure and more affordable, smaller, high density properties will become more popular says Du Toit. What is more is that the residential building market will, in all likelihood, also battle to bounce back until the price gap between new and existing houses decreases.

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