Real Estate News – Residential building costs set to soar

Rising interest rates and the uncertainty of more to come have dealt the residential property market a low blow, but the real villain of the peace for buyers in new residential developments and particularly first-time buyers is building cost inflation, according to Richard Thomas, Divisional Director of Nedbank’s Property Finance KZN.

Thomas presented a theoretically but overwhelmingly powerful case for aspirant homeowners to purchase with urgency if they were to avoid spiralling building costs in his recent address in Durban on the KZN property sector, according to an article in the October 22 Sunday Tribune Property Guide.

Using the model of a 60 sqm house at a current total selling price of R497 000 with a deposit of R7 000 and repayments based on a 11,5 percent interest rate (since been increased to 12 percent), Thomas said the current monthly repayment on a 25 year bond would be R4 981.

In twelve months time the price of the same 60sqm house will have been driven up by the expected 16 percent increase in building costs to R577 000. Assuming interest rates at that time to rise to 12,5 percent, which seems likely, the monthly repayments will be R6 215.

This represents an increase of R1 234 in monthly repayments based on the 16 percent increase in building costs, which accounts for an extra R813 a month and R421 from the one percent increase in mortgage interest rate, if realised.

But Thomas’s projection of rising building costs could be understated. Data released by Industry Insight this week suggests building cost inflation for the next 12 months could be in line with the 19 percent already recorded by Industry Insight for the 12-month period ending September 30.

Industry Insight construction economist Elsie Snyman says a number of burgeoning factors are combining toward a rapid increase in building costs with labour costs having caught the industry by surprise, increasing at a far higher rate than anticipated. The upward pressure on costs is also being boosted by contractors concerned by extensive media publicity on the ongoing shortage of skills and building materials.

The high cost of raw land and particularly the delays in both zoning and local authority approval for new developments are cited by both Thomas and Snyman as very serious. Snyman notes that delays are threatening the viability of new projects to the point that developers are withdrawing from the market or even moving offshore. The whole process she says has slowed to such significance that developments that normally took 12 months from start to finish are now taking three years.

Future end-user prices in KZN could also be affected by a projected slowdown in the planned delivery of new units. The volume of the province’s approved new building plans has fallen sharply according to Snyman. Total plans passed for the province in terms of single-dwelling, townhouses and clusters reflects an 8,9 percent growth for the forthcoming year compared to the 40 percent growth for December 2005 to July this year. Clearly the current pipeline supply of planned new units will carry the market through this year and into next year, but shortages of new building could occur later next year and in 2008 with a possible knock-on inflationary effect on prices.

Residential building costs in KZN, as measured by Industry Insight, are averaging R4 900 per sm and are currently 26 percent higher than Gauteng. This, Snyman says, is traditionally due to logistical problems, relating to transport, the lack of materials and range of products, requiring imports from Gauteng. She believes it very likely that KZN’s average residential building costs could broach R6 000 per sm within 18 months.

Article from: www.rodneyhayter.com