Residential Property Perspective Historical trends in new and existing housing in South Africa

Building statistics for new housing

The building statistics for new residential buildings regularly published by Statistics South Africa are a source of information with regard to the trends in the demand for and supply of new housing in the country. (see table in the 4th article of our Jan 2007 Newsletter)

From these statistics, it is evident that the planning phase (reflected by data for plans passed by local government institutions) and the construction phase (reflected by data for buildings completed) of new housing saw various cyclical movements over the past number of years.

Building statistics for affordable residential property at the lower end of the market (houses of less than 80m) have shown a very erratic trend over the past number of years that does not correlate well with broad macroeconomic trends. This may be the result of various factors influencing the delivery and financing of housing in this segment of the market. These factors include expensive development land and the high cost of and delays in rezoning land for highdensity, middle-class residential developments. These have contributed to a sharp increase in holding costs. The effect has been to put profit margins of contractors and developers under pressure in this segment of the market.

The number of new houses larger than 80m and new flats and townhouses completed increased significantly between 2002 and 2005. However, in the first half of 2006, the growth in the number of these residential buildings completed was relatively low compared with the same period last year. From 2002 up to mid-2006, a total number of 151 674 new houses larger than 80m and new flats and townhouses were completed.

With regard to the number of building plans approved by local governments for these residential buildings, growth peaked in 2004, which is also in line with trends in overall house price growth.

The abovementioned developments resulted from a strongly growing housing market in the past few years. Recent building statistics and price growth data confirm a slowdown in the market.

Building costs for new housing

The growth in the cost of building a new house was on a gradual upward trend from 6% on average in 1995 to 17,8% in 2003.

Since 1997, the rise in building costs has been above the headline inflation rate, which can be regarded as a reflection of an active building and construction sector over the past number of years. Factors such as a strong demand for building materials and skilled labour in view of the demand for new housing have also contributed to this development.

However, the year-on-year growth in building costs peaked in 2003 and has since been on a declining trend. This can be ascribed to the large number of developers and building contractors active in the housing market over this period, leading to greater competition.

With the residential market in the process of slowing down, and prospects of this trend continuing into 2007, some developers and contractors may leave the sector as a result of tight market conditions, lower levels of activity, tough competition and squeezed margins. This may moderate building cost increases over the next 12 to 18 months.

Size trends in new housing

According to Absas calculations, the average building area of newly-built residential properties was on a gradual upward trend between 1993 and 2003. In 1996, after interest rates had been increasing since late 1994, and in 2000, after the high interest rates of 1998/99, the average building area declined only marginally.

Despite the surge in house prices since 2000, which negatively influenced the affordability of housing over this period, the average size of new housing kept increasing until 2003 (see graph on building area, below). Stand size was probably compromised in an attempt to still afford a decent-sized house (see graph on land area, below).

However, the average size of new housing peaked at 174m in 2003, declining to 169m in 2004, 159m in 2005 and 156m in the first three quarters of 2006. This is probably because the affordability of housing eventually started to have an impact on the average size of newly-built housing.

The average size of stands on which new housing was built has been on a declining trend since the early 1990s. The average land area has dropped from 932m in 1991 to an all-time low of 520m in the first three quarters of 2006(see graph on land area, below). This can be ascribed to suitable vacant land for residential development becoming increasingly scarce, especially in the rapidly growing urban areas of the country.

In the first three quarters of this year, the average land area for new housing was 55,8% of what it was back in 1991 and only 40,8% of the average in 1980 when it was 1 275m. This is an indication of an increase in higher density residential developments over the years. This trend is expected to continue in future.

Price trends in new and existing housing

One of the indications of the state of the housing market is the comparison of the average price of new and existing houses, used to determine whether existing houses are overvalued in relation to new houses.

The rationale of this analysis is that, once a new house can be built for less than the cost of buying an existing house, the market is set for a downward correction.

In this analysis, the price of a new house includes the construction cost of the buildings, the market value of the stand, as well as VAT and transfer duty. However, in most instances, the price of a new house excludes the cost of landscaping and other improvements such as a pool, paving, lapa, perimeter walls, security systems and carports. The price of an existing house includes that of the buildings, the stand and all improvements to the stand, but excludes transfer duty payable.

There is, however, a belief that comparing the prices of new and existing houses is a meaningless exercise, as the average house in South Africa is a few decades old, and has depreciated over the years through aging.

In contradiction to this belief, many older properties have been renovated, expanded and improved over the years, in many cases more than once. These properties are thus generally not what they were a number of years ago, and have often appreciated in real value over time as a result.

Moreover, during a boom phase in the residential market, as was experienced over the past few years, the increased construction of new housing (see table in the 4th article of our Jan 2007 Newsletter) is expected to lower the average age of the housing stock.

At the peak of the property market boom in the first half of the 1980s, the price difference between new and existing houses had declined to almost zero before the crash of the mid-1980s. Currently the price difference is also very small, after reaching a level of R167 700, or 28,8%, in 2003 before tapering off to only about R12 300 , or 1,5%, on average in the first three quarters of 2006 (see graph below). This is the result of the nominal price growth of new houses increasing at a faster pace than that of existing houses during 2002 and 2003.

However, the nominal price growth of new houses was much lower than that of existing houses from 2004 up to 2006 (see graph below). This caused the price difference between new and existing houses to narrow significantly during this period.

Conclusion

There are quite a number of advantages and disadvantages to both building a new house and buying an existing house. There are also a wide range of aspects that need to be considered and checked when getting involved in a property transaction.

All of these factors, positive and negative, legal and financial, must be thoroughly investigated and considered, as the acquisition of property is normally a costly and lengthy process.

Various indicators with regard to new and existing housing such as building statistics, building costs, size trends and price developments, point to a strongly performing residential market in recent years. However, it is evident from these indicators that the market for both new and existing housing has cooled off in recent times.

Courtesy Jacques du Toit Senior Economist ABSA Bank

 

Search By Reference


NEWSLETTER SUBSCRIBE

Stay updated on the latest Property News

Contractor Find - The Smart Way to Find Your Contractor