It costs R629 500 more to build a house than to buy one

The replacement cost gap is usually used by property valuation experts for insurance purposes to determine the cost (excluding land values) to rebuild a home from scratch if, for example, it was burnt to the ground. 

The last time the cost of building a new home and buying an existing one were roughly the same, was in 2007 when house prices grew at double-digit levels and the home building boom was in full swing. Back then, says FNB property strategist John Loos, it was easier for property developers to roll out residential properties to the market given reasonable building costs. “It’s now increasingly difficult for developers to bring competitively priced new stock to the market and it’s reflecting in the building activity, which is not shooting the lights out.”

Underscoring this is the 1.39 million square metres of residential space that was completed in the three months to November 2016, compared with the 2.70 million square metres completed in the three months to December 2005, according to FNB.  

Building costs and house prices

At the same time, building costs continue to soar, with Absa’s data showing that the average building cost of new housing, constructed in January to November 2016, increased by 6.4% year-on-year to an average of R6 539/square metre compared with R6 148/square metre during the same period in 2015.

Regional data does not specify where exactly it is more expensive to build a home. However, Loos says building costs (such as material, concrete and rubble removal) vary from area to area. “Sometimes building costs are determined by home values too. If existing home prices in the Western Cape were a lot higher than somewhere else, you’d probably find that the building sector could charge more for building a new home than where properties are a lot cheaper.”

Another benefit for opting to buy an existing home is the discounts that can be achieved due to falling house prices. National house prices (in nominal terms) in 2016 rose by 5%, which is slower than the 7.2% and 6.5% for 2014 and 2015 respectively.

Expect more of the same in 2017, as house prices will remain in the low single digits due to the poor state of the economy. 

ORGINAL ARTICLE