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Tuesday Nov 05, 2013

Record price gap between new and existing properties

The price difference between an average new and existing home widened to a new record in the third quarter.

It cost 37.1 percent, or R672 400, more to buy an average new house in the third quarter compared with an existing house, according to the latest Absa Home Loans quarterly review of the residential property market.

Jacques du Toit, a property analyst at Absa Home Loans, said yesterday that the previous record gap between the cost of average new and existing homes was 36.8 percent, which was set in the first quarter of last year.

Du Toit attributed the wide gap partly to the sharp increase in building costs.

But he warned of the need to be careful when making a direct comparison between new and existing properties, which was based on Absa's own home loan book and could have been affected by shifts in the sample to properties of a higher value compared with a year ago.

However, Du Toit confirmed that the wide gap meant the housing market was not buoyant and strong and it was much more difficult for developers to bring new houses to market at affordable levels.

Du Toit said demand for houses had declined but the cost of new houses continued to increase because the input costs of producers of materials, including electricity, labour and transport, had increased and worked through to the cost of houses.

He said negotiations about the sale of an existing property under current economic conditions focused on what the owner believed was a fair price.

Aspects such as labour and building costs and the holding costs of the developer did not even feature in these discussions. By contrast, developers could not negotiate about the price of a new house.

Du Toit did not believe the huge gap between average costs of new and existing houses would narrow in the short term.

The gap has widened despite Absa Home Loans emphasising that continued low interest rates were beneficial to the affordability of mortgage finance and supported the demand for housing.

It said that with the variable mortgage interest rate currently at 8.5 percent a year, monthly repayments on mortgage loans were in general 35.9 percent lower than in early December 2008, when the rate was at 15.5 percent a year.

However, the nominal price growth of the middle segment of the housing market, comprising homes of between 80m and 400m2 priced at R3.8 million or less, declined to 9.3 percent year on year in the third quarter from 11.4 percent in the second quarter.

Absa Home Loans said the average price of a middle segment home in the third quarter was R1 172 100.

FNB, in its monthly residential property barometer released yesterday, questioned whether a housing 'bubble' was possibly forming.

FNB strategist John Loos said the house market appeared stable and balanced but the economy and household sector supporting it did not.

But Loos warned that any noticeable further acceleration in house price growth in the short term could become a sign of a market starting to move out of line with fundamentals.

Business Report


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