Buy or build?

With the slowdown of South Africa’s property industry, the glut of available stock is good news for buyers and there are plenty of bargains for those who are still in the market. This is great news for people who cannot yet afford their ‘dream house’ — they can now buy something in a lower price range and renovate to fit their criteria, rather than the costly and stressful exercise of building what they want.

Until recently, building a new home was considered more cost effective than buying and the advantages of the buyer being able to choose his own designs and finishes added to the appeal. Building stats for the third quarter of 2007 indicated that the rate of building material cost increases had slowed for the fourth consecutive quarter. While this slowdown doubtless contributed to the perception that it was cheaper to build, examples given in the media often failed to take account of the varying cost of residential land.

“Buying an existing property and renovating it to your liking still offers a far better return on your investment than building from scratch,” says Mike Bester, CEO of Realty1 International Property Group. “In addition, it’s much less stressful than dealing with the problems associated with selecting a reliable building contractor in an industry that is suffering from the same shortage of skills as many others in the country right now.”

The construction cost of an average house is around R4800/m²

A recent report in FNB’s Commercial Property Finance Residential Building Cost Index puts the construction cost of an average house currently at around R4800/m², but this figure is considered to be exceptionally conservative and the reality is closer to R6000/m² for basic finishes and anywhere from R10 000/m² upwards for more luxury.

With the power crisis further hampering the building of new residential units — both freehold and sectional title — the cost of building is pushed up further by having to budget for the installation of alternative power supplies.

There are some definite advantages to buying an established home, says Bester. “The first and most obvious factor is location. Very few established suburbs have residential plots available for sale and those that can be found are usually expensive. In a newer suburb, the buyer runs the risk of building in an area that later might not meet his criteria in terms of amenities and type of homeowners.”

And then there’s the garden. “’Second-hand’ properties usually have established gardens,” says Bester, “while new properties require landscaping from scratch.”

Another benefit of buying an existing property is that structure, fittings and finishes can be physically inspected for quality, defects and poor workmanship before buying. The neighbourhood and amenities are established and the plots are generally also larger than in newly developed areas. However, the buyer will be responsible for transfer duties, renovations could be costly in the long term and the ever-present ‘voetstoots’ clause could result in problems for those buyers who don’t have professional home inspections carried out.

The builder of a new home, on the other hand, might benefit from low initial maintenance, built-in transfer fees and the various guarantees that come with new workmanship. Nevertheless, these advantages can be outweighed by construction delays, uncertainty about the future of the new neighbourhood and the difficulty of obtaining finance.

Obtaining a building loan is certainly more difficult. Independent property economist Francois Viruly says the banking sector is very cautious about funding people who build their own homes. The land will be formally registered in the buyer’s name only once the full purchase price is paid. Standard Bank’s home loans division concurred, saying that “home builders are not generally accepted candidates for home loans and will only be considered under exceptional circumstances.”

If a bond is granted, the bank will authorise the loan to be used for the construction of a house only if the National Home Builders Registration Council (NHBRC) has approved the building contractor, in order to ensure that quality standards are maintained.

Higher transport costs could affect the delivery of bricks and cement

And finally, the costs involved can escalate out of control depending on issues such as bad weather, power outages and other potential problems. Unexpected material price increases can also play a part — higher transport costs as a result of recent petrol hikes could affect the delivery of bricks and cement and this is not a cost the builder is likely to carry.

“The old adage,” says Bester, “says budget for your project and then add 30 percent to cover unexpected costs and price increases.”

According to Sanlam’s Money Matters newsletter, at the end of the day it’s a financial decision. Potential builders should compare the cost of the house they want to build with the cost of existing houses of similar size and finish on the market. A good compromise is to buy a house that doesn’t quite fit your requirements and over time alter or renovate according to your financial situation.

“This enables you to buy a house that you can afford now, even if the interest rate goes up again, without giving up on your dream house,” says Bester.

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