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On average R437 500 cheaper to buy property than to build

7 Nov 2011

The latest Absa quarterly housing review revealed it was on average 29.4 percent, or R437 500, cheaper to buy an existing house than have a new house built in the third quarter of this year. This is the third consecutive marginal decrease in the price gap between new and existing houses compared with the previous quarter.

The price gap between new and existing houses hit a record high of 33.8 percent in the fourth quarter of last year. It subsequently declined to 32.5 percent in the first quarter of this year and to 29.7 percent in the second quarter.

Absa senior property analyst Jacques du Toit said the wide price gap between new and existing residential property was a major factor influencing new housing development. He said developers faced price increases, including for building materials.

He stressed that developers could bring housing to the market at a certain price and it was not possible to negotiate the price of a new unit to any level because in the end it would then not be profitable for the developer to build that unit.

"Developers face a lot of competition from existing property, where the price is negotiated between buyer and seller," he said.

Du Toit previously said the price gap would have to halve from its 33.8 percent peak before it started to stimulate a significant revival in building.

The number of new housing units for which building plans were approved increased by 12.8 percent year on year in the eight months to August.

This improvement was largely supported by strong growth of 46.3 percent year on year in the higher-density segment of flats and townhouses.

Du Toit said the more affordable segment of the housing market could support a revival in residential building activity but warned that not all the housing units planned were built. He said there was a gap between plans approved and what was built because of issues such as developers being unable to get finance or services not being available.

"Building plans passed are a good indication of what may happen in the future and the trend but the volume of units built will be different."

The buy-to-let market is unlikely to lead to increased demand for houses any time soon.

First National Bank Home Loans strategist John Loos said there were indications of a rental inflation surge last year but it appeared this had fizzled out this year. Loos said it would not be surprising in the near term to see many aspirant buy-to-let investors staying on the sidelines and buy-to-let buyers as a percentage of total buyers remaining relatively low.