|
|
Why do new homes cost so much?
Friday, 4 September 2009The cost of building a house has increased fourfold over the past twenty years. Part of the explanation is the increase in average home sizes. Since 1988 the size of the average new house has increased by 32%. However that is not enough to fully explain the cost increases. Even taking bigger houses into account, house building costs have still increased a lot more than inflation. This week we dig deeper to try and understand why.
The basis for this article comes from a paper recently published by the Australian Bureau of Statistics entitled "A Twenty Year History of the Cost of Building a New House"?. The article looks at building costs only and takes out all infrastructure charges, land costs, development approval costs, finance charges, and stamp duties that add another layer of increased cost.
One of the defining characteristics of new Australian suburbs over the past twenty years is the increase in average house size from 181m2 in 1988 to 239m2 in 2008.
Indeed the 3-bedroom '70s bungalow with avocado green basin set, shag pile carpet and sunken lounge has given way to the 2-storey four bedroom McMansion with rumpus room and home theatre.
Yet as the following table shows the increase in size alone is not enough to account for the increase in costs
  House building costs have increased faster than inflation |
Source ABS
When we extract the increase in size, and compare the rise in house building costs with inflation the cost to build a new home has increased a lot more.
In fact if house prices had risen in line with inflation, even at the larger size, current building costs should be closer to $160,000 rather than $236,000.
So what explains the significant difference? What about building materials and wages?
 Wages increases vs materials |
Source ABS 6247, 6203
According to the ABS Index of materials used in home building we can see that materials costs have actually increased a little less than general inflation. This is also the case with the big items such as concrete, timber, glass and bricks, which have tracked below inflation. Cheaper imported building materials, whitegoods tapware etc are another reason why building material costs have stayed down.
Turning to construction wages the chart shows that these have increased faster than inflation especially during 1998-2008. With the overheated building conditions, trade skills shortages and increasing wages of the last few years wages have outstripped inflation. However we can see that wages have still not kept up with house building costs.
Our calculation indicate that if we factor in building materials and wages growth the 231m2 house should still only cost around $166,000, leaving a difference of $70,000
Are house building companies raking in excess profits at the expense of the poor house purchaser. There is no evidence to support this with builders' margins remaining within a relatively narrow band in this very competitive sector of the economy.
GST was added in 2000 and that adds 10% to the cost so perhaps $25,000 is accounted for by GST.
That brings us down to say $45,000 of gap in costs of building the average home in 2009. This amount we believe is explained by changes to the construction market and the quality of houses purchased.
The average home purchased in 2009 includes 2 -3 bathrooms compared with 1-2 back in 2008. Kitchens have better fixtures, granite benchtops, dishwashers and high quality cabinets. More homes are two storey with higher structural costs and staircases included.
Building regulations, insulation, more rooms and walls, home theatres, rainwater tanks, better electrics, and more interesting open designs in the average new house probably explain the rest.
By Gary Emmett
<< Return to News
