Absa - Building costs and new and existing house price trends

In the third quarter of 2005, the cost of building a new house in the middle segment of the residential property market increased by a nominal 12,8% y/y compared with the same quarter in 2004, according to Absa’s Residential Property Perspective for the Fourth Quarter 2005.

This was still well above the average headline CPI inflation rate of 3,9% in the third quarter of this year, reflecting an active building and construction sector. Factors such as a shortage of certain building materials and a shortage of skilled labour because of a still relatively strong demand for new housing could also have contributed to this development.

However, the nominal y/y growth in building costs is still declining after peaking at 19,8% in the second quarter of 2003. This can probably be ascribed to the entrance of many new developers and building contractors into the property market during recent times, which increased competition.

The year-on-year increase in the building cost of new houses in the various categories was as follows in the third quarter of 2005:

* Small houses (80m²-140m²): nominal 12,4% and real 8,5%.
* Medium houses (141m²-220m²): nominal 16,7% and real 12,6%.
* Large houses (221m²-400m²): nominal 10,6% and real 6,7%.
* Affordable housing (40m²-79m²): nominal 17,4% and real 13,2%.
* Luxury housing (>R2,2 million-R8,2 million): nominal 14,4% and real 10,3%.

Against the background of these developments, the average price of a new house in the middle segment increased by a nominal 8,4% y/y to about R743 600 during the past quarter. The average price of an existing house in the same market segment increased by a nominal 22,9% in the third quarter of 2005 to about R707 800.

As a result, the nominal price difference between new and existing houses declined to about R35 800, or 4,8%, in the past quarter. This is the smallest difference since the second quarter of 1989, when it was 5,6%. The price difference between new and existing houses has been displaying a sharp declining trend since the first quarter of 2003, when it reached a record high of 31,4%.
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