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Consumers who expect the prices of new houses to level off over the next 12 months as the residential property boom continues to slow are in for a surprise. Industry commentators say soaring building costs are likely to push prices of new houses up at a faster rate than that of existing ones.
Latest figures from Absa show that the price difference between a new and an older, existing house was down to only 1,6% at end-2006. Traditionally, it cost at least 25% more to build a new house than to buy an existing one. Absa figures show that this difference peaked at around 30% at the beginning of 2003, declining dramatically since as the prices of existing houses started playing catch-up with that of their newly built counterparts.
However, it could become more expensive again to build instead of buy, in relative terms. FNB property strategist John Loos says South Africa's pool of building resources is likely to be allocated increasingly away from the residential property sector to infrastructure and commercial property development in the run-up to the 2010 Soccer World Cup.
He argues that this will not only limit the speed at which the residential sector can supply new housing stock but also raise the cost at which new houses will be built.
Greg Deans, a director of leading developer Rabie Property Group, who has amongst others Century City in Cape Town in its stable, shares this view. Deans says despite some commentators forecasting building cost increases to moderate during 2007, they have not yet seen a significant slowdown.
He points out that contract prices negotiated with suppliers show that actual building costs are rising at a faster rate than generally indicated by official figures. Deans believes rapidly rising building costs pose a greater risk to affordability than a short-term increase in interest rates.
He warns that building cost increases could accelerate in the build-up to 2010 as limited skills and material resources in the construction industry come under even further pressure. The message from this seems clear: Those considering to buy/build a new house best do it sooner rather than later. - Joan Muller
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