New homes to outperform pre-owned market in 2017

© Romolo Tavani – 123RF.com

“The traditional pattern when new home prices get this far ahead of pre-owned prices has been for buyers to focus heavily on the second-hand sector, causing stock shortages to develop in this sector and prices to rise relatively rapidly. At the same time, lower demand should cause the prices of newly-built homes to rise more slowly, and the market will tend to even out,” he says.

“Currently, however, the market appears to be deviating quite radically from that customary cycle, with new homes selling as fast and sometimes faster than pre-owned homes in many areas and their prices are actually rising much faster than those of second-hand homes. We think this is because of the increasing importance (in relation to price) of other factors influencing home choice - including security, location, lifestyle and increasing operating costs.”

Rising building input costs

According to the Absa Housing Review, Clarke notes, the average nominal price of a new house increased by 16.1% year-on-year in the third quarter of 2016 to R2,02m. In the same period, the average price of an existing (pre-owned) house increased by a nominal 3.5% year-on-year to R1,39m.

“To a large extent, this difference is attributable to rising building input costs. The Absa figures show that the actual cost of having a new home built showed a year-on-year increase of 10.6% in the third quarter of 2016, thanks to ongoing increases in the costs of materials, equipment, transport, labour, and especially the cost of developing vacant land for residential purposes.

“And the most expensive factor in land development is now often the actual acquisition cost rather than the cost of rezoning, for example, or the cost of installing services, or preparing for construction. Indeed, Absa says that the average value of vacant residential stands in the middle and luxury segments of the housing market for which it approved mortgage finance showed a year-on-year increase of 14.1% the third quarter of 2016 to about R736,000 – and that land acquisition costs now make up about 28.6 % of the total value of a new residential property in these segments of the market.”

“Key factors” reflected in increased land values

However, he says, Absa also makes another important observation, which is that sharply increased land values reflect various “key factors” with regard to the viability of new housing developments, such as location, the availability of land suitable for development in that location, the availability and accessibility of public transport and other physical infrastructure, and the proximity to places of work, schools, shopping centres and medical facilities.

“In other words, the factors that are so rapidly driving up the cost of development land and of newly-built housing are also important drivers of the continued popularity of new housing, even though it is in many instances more expensive than pre-owned homes of the same size.”

For example, Clarke says, increasing traffic congestion in SA’s major cities means that many homebuyers – of all ages - are now favouring established older areas close to central business districts over the outer suburbs, as well as those decentralised areas that also offer good live-work-and-play opportunities in that they are not only close to employment hubs but well-supplied with shops, schools, entertainment venues, sports facilities and other amenities close to home.

“These areas – and especially the inner suburbs - deliver a significant lifestyle improvement by significantly reducing the time consumers spend commuting. And many young buyers who can’t afford the large pre-owned homes with big gardens that are still prevalent in these areas are happy to settle for a small apartment there as a trade-off for that benefit.

Downsizing trend

“In addition, many older buyers who do have means are using them to acquire newly built homes in centrally located complexes that they perceive as offering another lifestyle benefit - more security. To these changing preferences one can also add the downsizing trend among repeat buyers seeking to lower both their maintenance obligations and operating costs, and it becomes obvious why there is such high demand for units now in just about any new development that consumers consider well-located, ranging from tiny studio apartments to ultra-luxury cluster homes in boutique estates.”

Meanwhile, he says, buyers in the affordable sector are favouring newly built homes currently because they come with structural and roof guarantees that older homes do not offer. “First-time buyers are also increasingly aware that while it may be more expensive to purchase a new home, doing so could actually mean big savings in the long run, because it is unlikely to need much in the way of maintenance and repairs for at least five years.

“And with all these factors coming into play, our expectation is that new homes will continue to sell extremely well in 2017 and that, due to the slow-down in new developments, prices in this sector of the market will continue to rise faster than in the pre-owned sector for the foreseeable future,” Clarke concludes.