Much cheaper to buy than to build

Johannesburg - The days of big profits for developers of new houses are over. On the contrary, developers are currently caught in a cost vice.

They have been negatively affected by continuously rising land prices, increasing building costs, a jump in the cost of providing services to land developments and higher labour and transport costs.

This combination of factors currently makes it about R328 700 or 23.5% cheaper to buy an existing house than to build a new one – as shown by Absa’s latest quarterly residential report.

The pressure on developers had been aggravated by the significant fall-off in demand for new housing reflected in recent construction figures, said Jacques du Toit, senior property analyst at Absa’s home loan division. He said that building activity had levelled off not only on the planning side, but also at the construction stage.

This was chiefly because household finances were still under pressure and consumers consequently prefer to look for more affordable accommodation.

Price gap widens

The gap between new and existing house prices in the mid-segment of the market (80m² to 400m²) was currently widening, Du Toit said, despite the cost of building new houses having levelled off in the second quarter of this year to nominal growth of 7.8% year-on-year (y/y).

This was considerably below the peak of 19.3% in the first quarter of 2004, when the residential market experienced a boom.

This increase in building costs had driven up the average value of a new house by a nominal 15.5% y/y to R1 396 200 in the second quarter of 2010.

Du Toit said one of the reasons for this increase was the nominal 14% y/y rise in land prices to about R498 100 in the second quarter of this year from 7.1% in the first quarter.

As for the prospects for developers of new houses, he does not expect a dramatic turnaround in building statistics for the rest of the year.

- Sake24.com

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