Q: What happens to house prices when replacement costs skyrocket?

[MichaelW]

Its something any investor should know the answer to. So, what do you think would happen to current housing stock prices if the cost to replace those dwellings with new constructions skyrocketed? At a minimum it would make a lot of projects unviable and further compound any current shortage. It would certainly put a strong floor under existing housing stock prices even if it didn't kick off any upward price pressure.

In time it would obviously increase yields which in turn would create upwards price pressure. Stock would remain in short supply until the valuations of new projects were in line or better than existing stock even allowing for the significantly higher construction costs. Holders of existing stock would reap the benefits, but as a quality of life outcome it would be poor as the cost to rent or buy housing stock would go up significantly. If costs went up significantly it could well see the end of the Great Australian Dream. We would have more and more Commercial unit builds with smaller dwelling sizes and more persons per dwelling. Hong Kong anyone?

While you're pondering the implications of skyrocketing construction costs, have a peruse of this article in BusinessSpectator today...

A home-grown threat to house prices

Let me add a home-grown threat that few would currently recognise – the carefully orchestrated government campaign to decimate independent contracting in Australia. If the government succeeds it's very likely it will increase the cost of building a house by 30 or 40 per cent and devastate industries like IT.

There's more to the current Australian residential property market dynamics than the US Financial Crisis and the China story. We have our own market drivers too...

Cheers,
Michael

 

[lizzie]

what do you mean "when". already with the 3 layers of government having a development/infrastructure tax money grab, basic sections for sale in outer sydney are up by anything up to $170,000 (in taxes alone).

and that doesn't include building anything on it yet ... another 10's of thousands grab when you submit your development application.

 

[MichaelW]

Hi Lizzie,

I know it. I think I'm done with developing in Sydney after my Mona Vale multi-unit. I will however poke around Brisbane and see what options are available.

So much for removing the red tape and making it less costly for developers to bring new product to market. Looks like "affordability issues" are here to stay.

Cheers,
Michael

 

[annie lumen]

Let's not overcomplicate things unnecessarily.

When replacement costs rise (and demand for new housing constant), then existing house prices will be pushed up as buyers chase older houses rather than new ones.

 

[MichaelW]

Let's not overcomplicate things unnecessarily.

When replacement costs rise (and demand for new housing constant), then existing house prices will be pushed up as buyers chase older houses rather than new ones.

Yup. And in a very simple not-overly-complicated way.

Its a simple demand/supply curve impact. Here's the CBA's take on it in its recent Housing Market Update.

Rising construction and material costs are also a factor that should broadly support existing house prices. In markets, prices tend to reflect marginal costs of additional supply. House prices are no different. Increases in the costs of new dwellings impact the price of the next nearest substitute, i.e. existing dwellings. Inflation in project home prices and home building materials has been picking up, as have other measures of housing construction prices.

As the infrastructure and construction boom builds in intensity, house construction costs are likely to rise further. Higher new home prices, relative to existing stock, discourages new construction and thus concentrates demand on the existing stock. This process contributes to the stabilisation of prices on the downside. Restrictions on new housing supply have meant that inability to produce adequate supply has exacerbated price rises at times over the past decade.

Cheers,
Michael

 

[bene313]

While you're pondering the implications of skyrocketing construction costs, have a peruse of this article in BusinessSpectator today...

A home-grown threat to house prices

I do not believe this necessarily has a favourable impact on house prices, as you imply Michael.

Indeed the focus on the article is not so much the effect on house prices, but the effect on the economy. An increase in construction costs of 30-40% will have damaging flow-on effects to the rest of the economy. This is bad news for house price growth.

I understand your argument regarding demand and supply, and yes supply will be restricted with such construction cost increases. However the flow on effects to the economy will lead to a big drop in demand, thus having a negative effect on house prices -- one cannot pay what one cannot afford!

 

[virgo]

Construction Costs

Hiya

And that is why i scratch my head and ask myself why am i not buying in Western Sydney where there are houses in the low 200s!

Heck! i can't even seem to erect a bloody tiny granny flat for less than 100K (and that is in my own backyard not including the land value!!)

 

[handyandy]

Let's not overcomplicate things unnecessarily.

When replacement costs rise (and demand for new housing constant), then existing house prices will be pushed up as buyers chase older houses rather than new ones.

Price of property is still a function of market forces.

It's a thing of supply and demand in that if the demand doesn't exist for the new property then the cost to build has a reduced impact as the new property will simply not sell.

This is the reason why builders go broke.

Cheers

 

[MrCrumbpacker]

what do you mean "when". already with the 3 layers of government having a development/infrastructure tax money grab, basic sections for sale in outer sydney are up by anything up to $170,000 (in taxes alone).

.

Apologies for my ignorance, but can somebody give me an indication of what sort of levies and costs a developer is subject to in NSW, if say you bought a pot for 200k, and expected to spend the same again building.

I have heard some horror stories regarding a phalanx of 'environmental impact studies' , 'damage assessments' of surrounding properties etc, etc.

How do the utility suppliers charge?

Do these costs apply to someone building there own home?

 

[VYBerlinaV8]

Over time the market will correct itself. Indeed, ever increasing building costs are likely to prop the market up.

 

[Ausprop]

replacement costs were a major driver during the perth boom of 2005/06. It made a mockery of the argument that land goes up in value and buildings go down in value.

 

[bene313]

Over time the market will correct itself. Indeed, ever increasing building costs are likely to prop the market up.

Increasing costs over time, yes it props the market up, also props up wages, spending, and business generally (ie. inflation).

A slap in the face to the economy from an immediate 30-40% increase in construction costs will do nothing to help house price growth, particularly in the short term.

 

[Aaron Sice]

replacement costs were a major driver during the perth boom of 2005/06. It made a mockery of the argument that land goes up in value and buildings go down in value.

i remember the price of steel, supplied to site, tripling on 5 years.

 

[Ausprop]

i remember the price of steel, supplied to site, tripling on 5 years.

yes steel was huge, as was bricks (when you could get them... I remember builders scouring classified ads and backyards trying to find unwanted bricks) and brickies rates seemed to go up 10c a brick everytine you spoke to them.

 

[Ausprop]

the carbon tax will also smack up the cost of housing. as will the cost of oil. and the rebuild of Japan. and the rebuild of brisbane. Come to think of it there are a lot of cost pressures on the horizon for houses.

 

[Aaron Sice]

maybe i should be hanging onto my 250sqm new home by the beach....

 

[VYBerlinaV8]

Increasing costs over time, yes it props the market up, also props up wages, spending, and business generally (ie. inflation).

A slap in the face to the economy from an immediate 30-40% increase in construction costs will do nothing to help house price growth, particularly in the short term.

It would be interesting to see. On one hand, you will have fewer houses being built despite steady demand, and the cost difference between new and second hand houses will increase, and yet you'll have construction-related employment dropping and thus less people spending.

 

[MrCrumbpacker]

Apologies for my ignorance, but can somebody give me an indication of what sort of levies and costs a developer is subject to in NSW, if say you bought a pot for 200k, and expected to spend the same again building.

I have heard some horror stories regarding a phalanx of 'environmental impact studies' , 'damage assessments' of surrounding properties etc, etc.

How do the utility suppliers charge?

Do these costs apply to someone building there own home?

No takers??

 

[bene313]

It would be interesting to see. On one hand, you will have fewer houses being built despite steady demand, and the cost difference between new and second hand houses will increase, and yet you'll have construction-related employment dropping and thus less people spending.

Would be interesting. If we did have a sudden increase in construction costs, this would probably feed into supply issues down the track. But with the economy how it is currently, immediate demand would be stifled by this change due to the feed back from the economy. IMHO.

Perth 2005/6 was a different kettle of fish. It would appear that the boom fed off increasing costs as our economy was firing and could handle the increased cost pressures.

 

[lizzie]

No takers??

it's a piece of string question.

levies differ from council to council. utilities depend on what is insitu and what needs to be installed.

all costs are liable by the builder - whether you are an owner builder or have someone do the management for you.