New build homes now 30 percent more expensive than existing ones

25 January 2017

Residential building growth is expected to remain weak this year, aggravating the plight of the building sector.

John Loos, a household and property sector strategist at FNB, attributed this to the percentage price gap between new and existing homes.

Loos said FNB estimated the percentage by which average full title home replacement costs exceeded the average existing home value had accelerated to 30.4 percent last year after being nearer to 21 percent at stages in 2014/15.

"This makes it increasingly difficult for the new development sector to bring competitively priced new stock to the market," he said.

"Weak house price growth in the existing home market of late has exacerbated the situation for the new development sector, because it has led to a widening in the replacement cost gap," he said.

Jacques du Toit, a property analyst at Absa Home Loans, said yesterday building activity since the 2008/09 recession had remained subdued and was unlikely to improve this year.

Du Toit said one of the reasons for this was that building costs each year kept increasing faster than the inflation rate.

He was at a loss to explain the different rates of increase in the building costs of the various housing segments.

Du Toit said the average building cost of houses smaller than 80m increased year on year per square metre by 13.6 percent between January and November.

By contrast, building costs per square metre rose by 4.1 percent year on year for houses larger than 80m and by 6.7 percent year-on-year for flats and townhouses in the same period.

Du Toit added that it appeared there had been a structural change in the building industry, because the economy had recovered after the 2008/09 recession and lower interest rates should have supported the building of residential properties.

He said the household sector took a massive knock during the 2008/09 recession and he doubted it had recovered from this yet, while bank risk and credit criteria had changed a lot from 2007 with the National Credit Act's introduction.

Du Toit said affordability was an issue, because of high interest rates on debt many households were stuck with following the strong growth in unsecured debt, which was credit card debt, personal loans and hire purchase agreements.

He believed these high debt levels had worked through to the property market, particularly as a home was the most expensive item most people would buy in their lifetime.

Du Toit said credit bureau TPN had reported that the average age of residential tenants had increased from about 27 years of age to above 30 years, despite the economy growing.

"That tells you people are renting or staying with family or friends for longer before buying a home. This has had an impact on the building industry, which is much more focused on flats and townhouses because of affordability, and is building smaller units," he said.

Du Toit said business and consumer confidence levels were also having an impact on the building industry.

"I believe many households can take up debt and move to a new house, but their minds and pockets are not seeing eye to eye. They have the financial means, but do not have the confidence to do so," he said.

Figures released by Statistics SA last week revealed that the volume of new housing units built grew by only 1.1 percent year on year in the 11-month period up to November last year. Only the segment for flats and townhouses registered some noticeable growth at 9.5 percent year on year, or about 1 000 new units, over this period.

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