The Price Gap Between Existing And New Houses

The latest quarterly First National Bank Building Confidence Index (FNB BCI) compiled by the Bureau of Economic Research (BER) of the University of Stellenbosch (US) ascribed the sharp slump in the demand for new houses in comparison to the price gap to that of existing houses.

New things usually cost more than those second hand or used. This also applies to houses in most instances but during mid-2007, just before the property bubble burst, the price of existing houses increased so much, that for a short period it became cheaper to build than to buy thus turning conventional logic on its head.

This rapidly turned into bust for many homebuilders when they could no longer afford their morgage repayments. This caused a sharp drop in the price of existing houses which were often auctioned off while the prices of construction materials rose.

At the beginning of the decade in the year 2000 the price gap was 28% peaking at 32% at the end of 2003, thereafter gradually dropping to below zero for a brief period during mid-2007. By the beginning of 2008, the gap had increased to almost 4%, and to 26% by mid- 2009. At the end of the first quarter of 2010 the gap decreased to 18%.

Investec economist Annabel Bishop stated the following in her conclusion on housing building data for April 2010: "Low interest rates, less stringent credit rules, and a positive real income growth will be the key for recovery in new home sales and hence employment, due to the job-creation potential of the construction industry. Given the poor economic data to date, we continue to expect an interest rate cut of 50 basis points at the monetary policy committee next month".

The home building industry may thus receive a boost next month when SA Reserve Bank Governor Gill Marcus announces the monetary policy committee’s decision on the repro interest rate which will help to further narrow the price gap between existing and new houses.

Pieter Rautenbach