Property

Gap biggest ever between building new and buying an existing home

BNZ chief economist Mike Jones has had a crack at number crunching the cost between building new and buying an existing home and says the $200,000 difference has never been wider.

Tuesday, October 31st 2023

In the BNZ’s latest Eco Pulse publication, Jones says the cost is about three times the long-run average, but it should narrow as building costs flatten and house prices rise – the bank is forecasting a 7% upswing through next year. 

Jones says the number crunching is an interesting exercise in its own right but also has relevance for the macro-outlook.

Build costs skyrocket

Nailing down one all-encompassing measure of build costs is nigh on impossible given all the variables in play such as size, location, complexity, and specification, he says.

“One thing that is clear though is that it’s become significantly more expensive to build relative to the situation only a few years ago. And that’s even before factoring in land costs. Depending on the measure you look at, construction costs have surged 35-45% over the past three years.”

Based on the most recent consenting figures, the average New Zealand wide per-square-metre build cost is now just north of $3,200. That is an increase of about $1,000/square metre from early 2020. That estimate is probably still on the low side given the potential for cost overruns relative to what’s consented.

“That said, the increase in per square metre costs roughly matches the growth in various measures of final construction costs,” Jones says.

Smaller homes

One factor reducing the overall cost of building is the fact smaller homes are being built. The average new residential dwelling is now around 140m2 in size. That’s well down on the 190m2 average from 2005-2014.

The explosion in town house construction from 2015 onwards accounts for much of this. But even looking at standalone houses only, the average size of about 190m2 has clearly trended lower from the 215m2 average through 2005-2015.

Despite the trend towards smaller builds, the average new build cost has still lifted about $100,000 on 2020 levels, to about $450,000 for all residential dwellings.

For the average stand-alone house, the increase has been a larger $160,000 to just under $600,000. These figures don’t include costs related to design, consents and, of course, land.

Average house size

Adding in the (median) cost of a residential section gets a rough estimate of the total average cost to purchase a new house. This can then be compared to the cost of buying an existing home, Jones says. 

“But first the build cost estimate needs to be altered slightly to proxy a constant-size build – using 180m2 (the post-2000 average). If we didn’t do this, build costs would be artificially ‘cheap’ compared to buying an existing house given the declining average size of new builds relative to existing homes.”

Doing this produces a cost to build estimate for an average residential dwelling of about $980,000, Jones says. “That’s made up of a near $400,000 section and a $580,000 build cost. That compares to the median sale price of existing houses of $785,000, taken from REINZ data. The latter of course remains well down on the almost $900,000 peak of late 2021.

“So it’s more expensive to build. It nearly always is,” he says.

The bank’s analysis puts the average new build premium over existing properties going back to 1995 at about $65,000.

The fact there is a persistent new-build premium makes sense, and is consistent with anecdote, Jones says.

Numbers indicative

Relative to buying an existing home, an equivalent new build offers the buyer the ability to customise, meets code, and will generally be higher spec’d (well insulated, double glazed etc.).

“Still, there’s no getting around the sheer size of the current premium. The almost $200,000 difference between building and buying is about the widest ever on our numbers.”

He says the numbers are indicative, they’re averages, and they vary by region.” But they’re strongly consistent with the anecdote and feedback around the traps. To the extent they’re representative of the decision facing the average punter, the general incentive to build rather than buy is low.

“Writ-large, these cost incentives matter. Elevated construction costs, lower house prices, and high interest rates are all conspiring against building activity. No wonder new building consent issuance has been in steady decline over the past two years. Any existing incentive to build arising from the new build carve out from the 2021 removal of mortgage interest deductibility may soon depart. The incoming government intends to progressively restore deductibility to all properties.”

Jones says all of this is potentially problematic in the existing environment. “We’re in the midst of a migration-fuelled population boom. There's additional pressure on housing resources as can be seen in rents. If cost issues are disincentivising the building of new dwellings relative to existing homes, it raises the odds we again end up underbuilding relative to the population’s needs.”

The implication is additional upward pressure on house prices as this extra housing demand finds its way relatively more into the existing home market, he says.

Comments

No comments yet

Unity 6.99
Heartland Bank - Online 6.99
ICBC 7.05
SBS FirstHome Combo 7.05
China Construction Bank 7.09
Co-operative Bank - First Home Special 7.10
Wairarapa Building Society 7.15
Co-operative Bank - Owner Occ 7.30
Kiwibank Special 7.35
BNZ - Classic 7.35
TSB Special 7.39
China Construction Bank 6.75
Heartland Bank - Online 6.85
ICBC 6.85
Wairarapa Building Society 6.94
Unity 6.99
Westpac Special 6.99
Kiwibank Special 7.05
ASB Bank 7.05
BNZ - Classic 7.05
AIA - Go Home Loans 7.05
Co-operative Bank - Owner Occ 7.05
China Construction Bank 6.40
Westpac Special 6.49
ICBC 6.49
AIA - Go Home Loans 6.69
BNZ - Classic 6.75
ASB Bank 6.75
Kiwibank Special 6.79
SBS Bank Special 6.79
TSB Special 6.79
Co-operative Bank - Owner Occ 6.85
Kainga Ora 6.99
SBS FirstHome Combo 6.19
AIA - Back My Build 6.19
ANZ Blueprint to Build 7.39
Credit Union Auckland 7.70
ICBC 7.85
Heartland Bank - Online 7.99
Pepper Money Essential 8.29
Co-operative Bank - Standard 8.40
Co-operative Bank - Owner Occ 8.40
Kiwibank 8.50
Kiwibank - Offset 8.50

More Stories

Apartment market takes a dive

Thursday, December 07th 2023

Apartment market takes a dive

Increasing constraints, including the cost and availability of credit, have meant a major slowdown in the apartment market. Consents dropped by 36% in the year to October – the lowest total since July 2017.

Auckland housing market rebounding

Wednesday, December 06th 2023

Auckland housing market rebounding

Wealthy Auckland buyers who can afford $2 million plus houses have returned to the market in force.

Tenant left with damages bill despite not being responsible

Tuesday, December 05th 2023

Tenant left with damages bill despite not being responsible

A woman who left a rented Manurewa, Auckland property she shared with her partner after discovering he was using methamphetamine is still liable for a half share of Tenancy Tribunal awarded exemplary damages and other debts owed to the landlord.

Private landlords should be included in bill – Property Brokers

Monday, December 04th 2023

Private landlords should be included in bill – Property Brokers

A big year is ahead for the property management industry.