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Building new does it stack up?

24 September 2016

For many people, building a house from scratch is the ultimate dream. For Belinda Jorgensen, a Wellington professional building a house in the Wairarapa, it's about minimal maintenance and practicalities.

"I mean, I love old houses and it's been a challenge to me to think do I really want something new and modern?" she admits.

"I did consider I could just buy an old cottage but it's just me and my daughter and there are just too many 'what ifs' with an old house.

"I wanted something new, something double-glazed and something I didn't want to worry about for the next 10 years."

The land component had been costly but by building to a modest 115 square metres, Jorgensen is keeping costs down.

And it's been the "hidden costs" that have surprised her.

"All the landscaping ... how much it's going to cost to put a hedge in ... Old trees, it costs a fortune to put established trees in, so I'm going to be sitting on bare land for a while."

Fortunately the building process has been surprised her.

It's been smooth sailing despite being "really really nervous" about the challenges she might face. New buildings, sections and off-the-plans purchases have been getting more popular as people wise up to exemptions from the new LVR (loan-to-value ratio) lending restrictions.

But cost-wise, is building new really that smart, or are you fiscally better off buying an existing house?
 

WHAT'S THE REAL COST?

The cost of building a new house depends on a number of factors.

Depending on your bank, exemptions to the LVR rules apply to bare land, new houses underway and even new homes under six months old bought from the developer.

But the cost of building is rising fast. According to property data firm Myvalocity, the sales price of a newly built house in Auckland has soared from $450,000 three years ago to $1.01 million today, including land.

New apartments in Auckland are not much better. They've jumped from $400,400 in 2013 to $745,000, a 86 per cent increase.

James Wilson, Myvalocity's head valuer, says the figures clearly show how the market is focussed on the more expensive end of the market.

But what's also notable is the gap in price between existing and new dwellings. Three years ago the gap was just 5.6 per cent; nearly 3.5 years later, new buildings are 23 per cent dearer.

It's estimated that building costs in the main cities have risen 21 per cent in the last nine years.

Soon after the global financial crisis, the cost of building fell. But it rebounded in 2011 as the Christchurch rebuild got under way, jumped markedly the year after, and it's been climbing annually by between 1.5 per cent and 5.5 per cent a year ever since.


WHY IS IT SO EXPENSIVE?

Beacon Pathway, an independent consultancy, had a crack last year at trying to estimate building costs and see where the fat was.

It took 69 social or "affordable" new builds across Auckland and found that, interestingly, land only amounted to about a quarter of the cost. That's interesting because there are often statements made that Auckland's soaring land values are now up to half of a house's price when it's sold.

Council consenting costs, another aspect of the building system frequently blamed, were only 4 per cent of total costs.

Construction costs were 51 per cent of the total, with "huge variances" between the least expensive and most expensive houses.

Even accounting for the number of bedrooms, Beacon found the cheaper houses were built for a surprising 51 per cent less money - about $1617 per square metre compared with $2569/sqm.

In fact, there was a $193,000 gap between the cheapest quartile and the most expensive, which cost $378,418.

Land development costs also ranged widely from $8111 to $24,503. Even a 10 per cent saving over these two areas could shave over $30,000 from the cost of construction, Beacon said.

Kevin Atkinson, chief executive of Generation Homes, believes building new is still affordable in most places, and demand for house and land packages is still strong.

"But a lot of it depends on location. In Auckland, you're looking at $700,000 to $1.2m and that's almost entirely predicated by the cost of the land and the house."


LAND WARS

The influential cost of land is the reason that any discussion about new builds invariably involve land supply. It's human nature that when prices are still rising, people hang on for a better gain.

In Auckland, there is a strong lobby which believes that removing the city's limits is the key to lower house prices.

The argument is that landbankers would lost any future growth they are hanging out for, and as more sections hit the market, prices will flatten.

However, inside the limits, there's another price driver, zoning. People are prepared to pay more for sections if they can add more dwellings or build higher.

Other factors pushing up building costs are the scarcity of tradespeople, access to infrastructure, and the rising cost of building materials.

Atkinson says it costs $70,000 extra to build an identical house in Auckland than it does in the Waikato because of utility fees and "Auckland costs".

He believes Kiwis are waking up to the fact they can't afford big first homes anymore.

Or they are "cutting their cloth" in new ways. His firm is now building big 260sqm homes, designed to accommodate dual households. "Son and daughter and their children pay the mortgage and the parents provide the equity," he says.


THE LITTLE THINGS

Like Atkinson, Beacon's Nick Collins believes that our expectations about design, size and finish are major parts of the cost equation, and the one part that is in our control.

We like big houses, with house sizes now virtually double from what our parents had. We also like bespoke, individualised houses, which makes it harder to get cost efficiencies.

The level of finish, internal layout and whether it's got a single or double garage are all things that make a big difference to the bottom line.

Collins says that throughout the 1950s, '60s and '70s, Kiwi floorplans were simple and costeffective. They had one bathroom, one toilet, one living room, three bedrooms and sometimes not even a garage.

"Go out and look at the affordable housing that's being built and often they're quite complicated structures.

"The more corners you have in a house, the more it's going to cost you and we have urban design protocols that want to see variety in the street appeal of houses."

Simpler tastes could also bring in cheaper building methods.

Doing walls in a factory, where weather does not stop work, for instance, would be a big productivity improvement.

But because people and developers always want to build the biggest house on the smallest section, Collins says the cost of building is in a vicious cycle.

"The market will always maximise the cost. If you accept that the market accepts the highest price. I would argue construction costs are out of control, not because everything has gone up, but because no one's under pressure to keep an eye on them."

One way he thinks we could stop the cycle is by building more social housing and encouraging institutional investors like the New Zealand Super Fund to stump up the money.

Overseas, institutions are turning to housing for higher returns than other assets.

He also suggests that we ramp up the affordability ratios in special housing areas.

"Tell the developer buying or leasing this land that they need to deliver one third affordable, one third market and one third maybe social housing."

 

 

SOURCE: Dominion Post Weekend, Wellington by Catherine Harris