New versus existing housing

Private Property South Africa
Jacques du Toit

*Jacques du Toit, Senior Property Economist of the Absa Group, looks at

historical trends in new and existing housing in South Africa*

Various indicators with regard to new and existing housing such as building

statistics, building costs, size trends and price developments, point to a

strongly performing residential market in recent years. However, it is evident

from these indicators that the market for both new and existing housing has

cooled off in recent times.

Building statistics for new housing

The building statistics for new residential buildings regularly published by

Statistics South Africa are a source of information with regard to the trends in

the demand for and supply of new housing in the country (see table).

Building statistics for affordable residential property at the lower end of the

market (houses of less than 80m²) have shown a very erratic trend over the past

number of years that does not correlate well with broad macroeconomic trends.

This may be the result of various factors influencing the delivery and financing

of housing in this segment of the market. These factors include expensive

development land and the high cost of and delays in rezoning land for

high-density, middle-class residential developments. These have contributed to a

sharp increase in holding costs. The effect has been to put profit margins of

contractors and developers under pressure in this segment of the market.

The number of new houses larger than 80m² and new flats and townhouses completed

increased significantly between 2002 and 2005. However, in the first half of

2006, the growth in the number of these residential buildings completed was

relatively low compared with the same period last year. From 2002 up to

mid-2006, a total number of 151 674 new houses larger than 80m² and new flats

and townhouses were completed.

With regard to the number of building plans approved by local governments for

these residential buildings, growth peaked in 2004, which is also in line with

trends in overall house price growth.

The abovementioned developments resulted from a strongly growing housing market

in the past few years. Recent building statistics and price growth data confirm

a slowdown in the market.

*([Click

here](https://www.privateproperty.co.za/news/images/200611/ABSA%20-%20Residential%20Building%20Stats.pdf) to download the Residential Building Statistics sheet)*

Building costs for new housing

The growth in the cost of building a new house was on a gradual upward trend

from 6% on average in 1995 to 17,8% in 2003.

Since 1997, the rise in building costs has been above the headline inflation

rate, which can be regarded as a reflection of an active building and

construction sector over the past number of years. Factors such as a strong

demand for building materials and skilled labour in view of the demand for new

housing have also contributed to this development.

However, the year-on-year growth in building costs peaked in 2003 and has since

been on a declining trend. This can be ascribed to the large number of

developers and building contractors active in the housing market over this

period, leading to greater competition.

With the residential market in the process of slowing down, and prospects of

this trend continuing into 2007, some developers and contractors may leave the

sector as a result of tight market conditions, lower levels of activity, tough

competition and squeezed margins. This may moderate building cost increases over

the next 12 to 18 months.

Size trends in new housing

According to Absa's calculations, the average building area of newly-built

residential properties was on a gradual upward trend between 1993 and 2003. In

1996, after interest rates had been increasing since late 1994, and in 2000,

after the high interest rates of 1998/99, the average building area declined

only marginally.

Despite the surge in house prices since 2000, which negatively influenced the

affordability of housing over this period, the average size of new housing kept

increasing until 2003 (see graph on building area). Stand size was probably

compromised in an attempt to still afford a decent-sized house (see graph on

land area).

However, the average size of new housing peaked at 174m² in 2003, declining to

169m² in 2004, 159m² in 2005 and 156m² in the first three quarters of 2006. This

is probably because the affordability of housing eventually started to have an

impact on the average size of newly-built housing.

The average size of stands on which new housing was built has been on a

declining trend since the early 1990s. The average land area has dropped from

932m² in 1991 to an all-time low of 520m² in the first three quarters of 2006

(see graph). This can be ascribed to suitable vacant land for residential

development becoming increasingly scarce, especially in the rapidly growing

urban areas of the country.

In the first three quarters of this year, the average land area for new housing

was 55,8% of what it was back in 1991 and only 40,8% of the average in 1980 when

it was 1 275m². This is an indication of an increase in higher-density

residential developments over the years. This trend is expected to continue in

future.

Price trends in new and existing housing

One of the indications of the state of the housing market is the comparison of

the average price of new and existing houses, used to determine whether existing

houses are overvalued in relation to new houses. The rationale of this analysis

is that, once a new house can be built for less than the cost of buying an

existing house, the market is set for a downward correction.

In this analysis, the price of a new house includes the construction cost of the

buildings, the market value of the stand, as well as VAT and transfer duty.

However, in most instances, the price of a new house excludes the cost of

landscaping and other improvements such as a pool, paving, lapa, perimeter

walls, security systems and carports. The price of an existing house includes

that of the buildings, the stand and all improvements to the stand, but excludes

transfer duty payable.

There is, however, a belief that comparing the prices of new and existing houses

is a meaningless exercise, as the average house in South Africa is a few decades

old, and has depreciated over the years through aging.

In contradiction to this belief, many older properties have been renovated,

expanded and improved over the years, in many cases more than once. Therefore

these properties have over time often appreciated in real value.

Moreover, during a boom phase in the residential market, as was experienced over

the past few years, the increased construction of new housing is expected to

lower the average age of the housing stock.

At the peak of the property market boom in the first half of the 1980s, the

price difference between new and existing houses had declined to almost zero

before the crash of the mid-1980s. Currently the price difference is also very

small, after reaching a level of R167 700 or 28,8% in 2003, before tapering off

to only about R12 300 or 1,5%, on average in the first three quarters of 2006

(see graph). This is the result of the nominal price growth of new houses

increasing at a faster pace than that of existing houses during 2002 and 2003.

However, the nominal price growth of new houses was much lower than that of

existing houses from 2004 up to 2006 (see graph). This caused the price

difference between new and existing houses to narrow significantly during this

period.

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