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Its now 33% cheaper to buy an existing property than to build

8 Mar 2011

The price gap between an existing and new house is at a new record level and it is now 33.8 percent cheaper to buy an existing house than to build a new house.

This suggests an improvement in activity levels in the beleaguered building industry is a long way off as demand for new houses is likely to remain low. Low activity levels in the residential building market is also negative for cement sales and job creation.

Jean-Marie Talbot, the president of Master Builders South Africa, said last month the extremely lean times in the industry over the past two and half years meant the industry was uncertain about its prospects for survival.

Talbot said early casualties of such uncertainty were the dramatic job losses that had already occurred, resulting in a loss of valuable skills at all levels of the workforce, which in turn impacted on safety, productivity and workmanship.

Pretoria Portland Cement (PPC) was concerned about the outlook for the local building and construction industries in the short term as cement sales fell 5 percent for the quarter to December and were still falling.

PPC clamped down on overhead costs other than advertising and strategic projects because of the severe downturn in the industry.

The increasing price gap between existing and new properties was revealed in the latest Absa quarterly housing review.

Absa said the average price of an existing house dropped by 0.7 percent year on year to about R991 700 in the fourth quarter, which meant it was 33.8 percent cheaper to buy an existing house than to have a new home built in this quarter, It was 29.5 percent cheaper to buy an existing house in the third quarter of last year.

Jacques du Toit, a senior property analyst at Absa Home Loans, said yesterday statistics going back to 1980 indicated that the price gap between existing and new houses was now at a new record level.

Du Toit said the price gap was also relatively large at 31.4 percent in the first quarter of 2003. He believed the price gap would put further pressure on the new building side of the residential property market.

"The trend in residential building activity over the past two years is just downwards. It's a big gap (between existing and new houses) and the cost of construction of new houses continues to increase."

Residential property developers were sitting with costs, including increasing transport and labour costs, which meant they could not reduce new house prices and it was difficult to bring new homes onto the market at affordable prices.

Developers were unable to absorb all the increased costs and had to pass them onto consumers, which suggested the average size of house stands would remain small.

"Building activity in terms of new housing will remain under pressure for a long time to come, probably for the large part of this year," he said.

Business Report