Buying vs building gap stretches

Buying vs building gap stretches

Building costs set to increase by more than 12% this year: Report


Building your own home at current building costs could amount to 29% more than buying an existing house. This figure is likely to increase in 2012 and even further in 2013.

Property analyst of Absa Home Loans, Jacques du Toit, says it is unlikely that the gap between buying and building will shrink any time soon and if it does it’s improbable that it will drop beyond 25%. The gap peaked at roughly 34% in the fourth quarter of 2010.


In mid-2007 the prices of existing and new houses met, but since then existing house prices dipped slightly in 2009 and started moving steadily upward. New house prices, however, continued moving upward from 2007 with building costs dipping slightly in 2010, peaking around 2011 and then moving sidewards.


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A report on building costs released in Q4 2011, forecasts that tender prices are likely to increase by 12.1% this year and a further 16.3% in 2013. The report was compiled by Johan Snyman of Medium-Term Forecasting Associates in conjunction with the Bureau for Economic Research of Stellenbosch University.
To read the full report click here>>

The tender price is what a contractor or developer will quote you in terms of materials, labour, factory costs and overheads and includes his or her profit.

The report expected an increase in building costs of 4.5% in 2011. It states that a weaker rand exchange rate implies higher local input costs of materials and construction plant prices.

Builders have little option but to pass these increases on in the form of higher tender prices. Snyman says tender prices rose by more than 14% in 2008, dropped by -0.9% in 2009 and declined by a further -0.2% in 2010.



Snyman says potential home builders would therefore do good to proceed this year rather than leave it until 2013.

Du Toit agrees that prices are likely to climb due to hikes in among others, building materials, transport and labour costs and equipment.

He says potential homeowners tend to focus on existing properties as they can pick them up at a relatively good price in the current climate and sellers are also more open to negotiation. Du Toit says this is very seldom the case with a new home or development as the developer brings the property to market at a certain price, having factored in his or her costs and profits.

FNB’s household and property sector strategist, John Loos, is of the view that building costs will not accelerate much this year and will continue to remain under pressure. FNB calculates what it terms a full title property replacement cost gap.

The gap measures the percentage by which the replacement price exceeds the average price. “What it would cost if you had to demolish, take away that structure and rebuild from scratch,” Loos explains.
He says that gap has widened and he doesn’t foresee much building cost growth this year. “We’re going into a slow economic period. As it is the existing market is over supplied and the replacement cost gap has widened to 20% which is quite significant in weak times like this.”

He adds he cannot see any significant recovery in building activity and therefore the pricing power of the building materials sector is going to be under pressure. “Whatever the building cost increase was last year, I don’t expect it to be much different this year,” Loos said.

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