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  • A Different Build vs Buy Question

    I recently sold a section that I was intending on building on. The reason for selling was that the cost to build vs the cost to buy a similar house had a huge price differential.

    Land: $430,000
    Build: $750,000 (this is an estimate of all-up completion incl landscaping)

    Buy Existing: $800,000 - $900,000

    What I don't understand is this:

    We have a group of pundits saying houses are overvalued by 30% or so. This will reduce the cost of buying existing (my example) to around $600,000 give or take.

    Comparing apples with apples, let's assume the 30% reduction also applies to the land in the "build" option - bringing the land to $300,000.

    That leaves the cost of the build. What makes up the cost of the build - mostly labour & materials, right? I don't see materials coming down in cost anytime soon - especially if the NZ dollar takes a wee dip. Labour might drop a bit, especially if builders are scratching for work, but 30% less? I don't think so.

    On the flip side we have people saying that not only do house prices have to fall, but wages have to rise as well. One would assume this means across the board, so would include builder's wages. It's a conundrum.

    So I'm confused. The price differential is already on the side of buying existing, and if house prices do drop according to "the plan", this differential will only widen.

    Who would build in this climate? And if no one builds, this will put upwards pressure back on the prices of existing houses.

    In other words, how can prices of houses drop 30% when it's far far below replacement cost? What are building company margins?

  • #2
    Between 5% & 15% in my experience K1W1. (got growled at for giving away sensitive commercial information :-) *that's volume building co's (others can be as high as 30%)

    Yep, I completely understand the confusion you've illustrated. My thoughts on it are that there is a tipping point coming up.

    I.E the existing houses get bought at the now lower market value (maybe below replacement) but once the dust has cleared and people are putting money back into housing both through a natural supply / demand example & through investing etc, then the current stock gets exhausted and more building has to occur to take on the increased demand and catch up.
    That's when an equillibrium occurs and those who bought existing may well see a steady increase in value back up to or above replacement cost.

    Just my thoughts.

    I actually know of a developer who had 40 Houses on the ground that he's slowly sold off at cost over the past year just to get rid of them, now he's building a couple at a time, mostly to order and making his margins.
    Last edited by outspoken; 24-09-2008, 10:31 AM. Reason: got growled at

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    • #3
      This adds to something I have wondered for so long
      - builders and subbies in Aus get paid more
      - materials used in Aus and NZ are similar
      why do houses cost more to build here?

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      • #4
        Originally posted by k1w1 View Post
        Build: $750,000 (this is an estimate of all-up completion incl landscaping)

        Buy Existing: $800,000 - $900,000

        We have a group of pundits saying houses are overvalued by 30% or so. This will reduce the cost of buying existing (my example) to around $600,000 give or take.

        Comparing apples with apples, let's assume the 30% reduction also applies to the land in the "build" option - bringing the land to $300,000.

        That leaves the cost of the build. What makes up the cost of the build - mostly labour & materials, right? I don't see materials coming down in cost anytime soon - especially if the NZ dollar takes a wee dip. Labour might drop a bit, especially if builders are scratching for work, but 30% less? I don't think so.

        On the flip side we have people saying that not only do house prices have to fall, but wages have to rise as well. One would assume this means across the board, so would include builder's wages. It's a conundrum.

        In other words, how can prices of houses drop 30% when it's far far below replacement cost? What are building company margins?
        Hey mate, here are my 5 cents.

        The land may well drop in excess of 30%. I really don't see the run-of-the mill Albany sections that have been selling for about $400k each just before the bubble burst last year, and can now be secured for less than $300k (some trickier ones are selling right now in mid 200s) costing more than about $200k by the end of the slump; possibly even less. That's about 50% down from the very peak. Just my guess, nothing more. And it's the single biggest item on the cost sheet isn't it?

        I remember a mate of mine complained a couple of years back he found it hard to find a decent builder for less than about $45 per hour, and I'm not talking project manager. Well, I am quite sure the same person would easily agree to work for $30 or less nowadays. That's 35% saving too. So, I do think so - the labour costs will go down dramatically. Even $25/h still beats washing dishes in a restaurant for $12.50/h for instance in a recession when there's bugger all building work to be found.

        The international commodity prices have been declining in the last few months, including oil, steel and wood.

        Finally, the compliance costs and red tape slowdowns (a significant % nowadays, appearing both in build and subdivision cost), I can easily see them slashed by well over 50% accross the board.

        Plenty of savings (not imminent but) possible I reckon. Over 30% in total easy.

        750 grand to build? What's that, a Bel Air mansion?

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        • #5
          haha - 2 very different answers there.

          outspoken is saying (hope I'm right in paraphrasing this) that the price to buy will come down whilst the price to build, although coming down a bit, will result in the gap widening to the point where it becomes silly to build (unless you're seriously into DIY or really don't mind paying over the odds for your own design). Ultimately the stock runs out and building takes over again, lifting the price of buys as it goes.

          679 is saying he reckons it's quite feasible that the costs to build may indeed drop to match the buy-cost's falling rate.

          Yeah, it was going to be a pretty nice place. Am thinking now about adding onto the the house we bought instead, which is my reason for asking the q. Should we wait for the build prices to drop (if that is what people think might happen)?

          The problem, as always, is knowing when is the optimum time.

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          • #6
            outspoken is saying (hope I'm right in paraphrasing this) that the price to buy will come down whilst the price to build, although coming down a bit, will result in the gap widening to the point where it becomes silly to build (unless you're seriously into DIY or really don't mind paying over the odds for your own design). Ultimately the stock runs out and building takes over again, lifting the price of buys as it goes.
            Nearly.
            I'm saying the price to buy is already down, may go down abit more.
            The gap is already wide enough that to build is silly, unless this doesn't bother you, or you want something abit special.
            Ultimately the stock runs out and building takes over again, lifting the price of buys as it goes.
            That parts right.

            I pretty much know that it isn't going to get any cheaper to build, unless everyone reduces margins and or wages drop. But this aint gonna happen as people are hurting enough as it is, Wages need to inflate not deflate.

            The only way it gets cheaper is as 67910241 says, the land component drops. possible, but they aren't making much more of it, they just need to RELEASE more of it, for that to happen.

            Compliance is the other point he makes which is perfectly valid, it HAS to drop!
            Last edited by outspoken; 24-09-2008, 12:38 PM.

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            • #7
              I made a lot of assumptions in the above comment, so it's a hypothetical combination of scenarios.

              Of them all, I'd say the most likely thing to keep depreciating rapidly (in the short term) is bare land. It costs to hold and while no one wants to build it's extremely difficult to sell at any "reasonable" price, so it will keep getting sold below it till it reaches a point where someone will actually wish to buy and build.

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              • #8
                And they won't be releasing any while the reports are all "cheapest time to buy for years!".

                OK, let's assume land does drop but building costs don't. Even a 50% drop in land price will still not match buy price at the moment.

                Taken to its logical conclusion, it should be a FANTASTIC time to buy, yet there are so many 'experts' talking about the high cost of homes and how it has to drop back.

                NZ is 6.6x average salary, which is almost twice as high as the US and higher even than UK.

                These opinions/angles are polar opposites of each other, and I don't understand how that can be.

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                • #9
                  Should we wait for the build prices to drop (if that is what people think might happen)?
                  Don't hold your breath! we've had 6 increases in the past year to the tune of about 24%

                  You can still build relatively cost effectively, you just need to pull as much of the contract apart as you can and project manage it yourself. Then you save the margin on the margin.
                  Last edited by outspoken; 24-09-2008, 01:02 PM. Reason: more commercially sensitive info

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                  • #10
                    Well, don't forget you're building a brand new house, with all of the bells & whistles if you want them, there's been a real advance in some of the products used. And it's BRAND NEW.

                    With buying existing, you're stuck with what someone else has chosen (broadly speaking)

                    So, of course, there will always be a premium to pay for that.

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                    • #11
                      Well yes & no. I've also been told that it's way more expensive per square metre to extend/add on owing to all sorts of reasons.

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                      • #12
                        NZ is 6.6x average salary, which is almost twice as high as the US and higher even than UK.

                        These opinions/angles are polar opposites of each other, and I don't understand how that can be
                        K1W1, My opinion is that's because all the money that's been created in the past few years has gone into inflating the prices of things that go into building Houses, and then the actual Houses themselves ontop of that. (Among other things, stocks, other asset bubbles)

                        The whole House price inflation is coming back, i.e drops in sale price.
                        But the cost of the things that go into making a House aren't coming back, and probably wont.

                        Not alot of that money has gone into wage inflation
                        Last edited by outspoken; 24-09-2008, 12:58 PM.

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                        • #13
                          I've also been told that it's way more expensive per square metre to extend/add on owing to all sorts of reasons.
                          per square metre rates can be a red herring, you have to look at the whole project.

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                          • #14
                            my 2 cents - echoed on the other thread. We have a section at the lowest end of the AUckland market - land value according to rates valuations is $60k, but its cost over $100k to subdivide - over half that goes to the council and its partners in bureaucracy. It would be damn near impossible to sell for any more than $160k.

                            Outspoken - excellent point you make, for all but the bottom 10% of buyers, they want a house that has the things that are important to you. Build new, you get this. Buy existing, you have to budget in new carpet/deck/drapes/kitchen as its not very likely you'll find it all there. Unless you're looking in that $700-800k bracket, heaps to choose from and all with MOST mod-cons.
                            two ears and just one mouth.. for good reason.

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                            • #15
                              ... perhaps you have also discovered why the construction industry is being nailed to the wall at the moment? After all who would build if its cheaper to buy... especially if you are worried that your builder/developer may go out of business half way through your construction project.

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