To Build or to Buy?
2013/08/26

"It would likely cost quite a bit more to rebuild your house if it burns to the ground than to purchase another one elsewhere."

That is because building costs in South Africa almost always outstrip the purchase price of existing new homes.

Upon valuing homes, it has been shown that the full title property replacement cost gap was at 19.4% for the second quarter of 2013. It will therefore, on average, cost 19.4% more to rebuild your full title property than it would be to buy a different comparable house.

In the May 2013 property barometer the gap was narrowing, perhaps showing improvement in pricing realism in the building sector, which would sustain positive building activity growth.

The gap has both been wider and narrower in the last fifteen years. In 2000 the gap stood at 36%, while in 2007 it was virtually at zero. With a substantial gap, such as the current 19.4%, it is obviously difficult for residential builders and developers to bring competitively priced residential stock to the market. The 2007 level facilitated the peak of the residential building boom in that year, as back then it was very easy for the development sector to compete price-wise with the existing home market. It is important to remember that this gap calculation also includes the cost of perhaps demolishing some of the remaining buildings on the property in order to rebuild.

This has a couple of implications. For prospective homeowners, it is probably an incentive to buy rather than build. On a more macro level it obviously negatively impacts the building industry.

On a more macro level it obviously impacts the building industry.

Property Investor