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New houses could soon be cheaper

New houses could soon be cheaper

The gap between new and existing builds will narrow in the next few years as tax rules become less favourable for new properties, writes Sally Lindsay.

By: Sally Lindsay

2 April 2024

In February existing properties sold on average for $768,050 versus new builds of $811,000.

Because they’re theoretically of higher quality than existing houses, new builds always tend to carry a price premium, but CoreLogic says the gap will narrow in the next few years as tax rules become less favourable for new properties.

Recently developed CoreLogic Market Trends dataset contains a breakdown of sales split by existing houses and new builds, a topic of huge interest because of the changing landscape for lending and tax rules, which currently favour new builds over existing stock.

New build cost

For most of the time since 2002 there has tended to be some kind of new-build premium, averaging six per cent over that period, but ranging quite widely from minus two per cent up to 15 per cent.

Interestingly, new builds were slightly cheaper than existing properties over a period of about two years from mid-2009 to mid-2011, when the construction sector was battling the global financial crisis (GFC) and its aftermath, suggesting some discounting was necessary around then to get new properties sold.

But there have also been periods when the premium has been significantly positive, most notably in double-digits for most of 2002-04, and again from mid-2016 to mid-2020.

To some extent the gap might then have started to close from mid-2020 (with existing prices playing catch-up) due to people rushing in during the post-Covid phase and taking an “any house will do” approach.

Either way, the percentage premium is now at average levels of about six per cent, but it’s quite significant in dollar terms, ranging from about $40,000 up to about $50,000 over the past year or so.

1. New vs. existing median sale prices (Source: CoreLogic)

House construction

The fact that a new-build premium has generally existed through time is no real surprise.

After all, they require less maintenance and will tend to be higher quality (e.g. better insulation) than the average existing dwelling, which justifies a higher price.

CoreLogic’s chief property economist, Kelvin Davidson, says on top of that, although the growth has slowed down now, there’s previously been sharp rises in residential construction costs over the past three to four years, conceivably meaning that new builds have simply had to be priced higher.

In addition, new builds have been strongly favoured in recent years by lending and tax rules, or in other words exempt from the LVRs – meaning maybe a 10 per cent deposit at present rather than 20 per cent for owner-occupiers or 35 per cent for investors – and still being able to have 100 per cent mortgage interest deductions on landlords’ tax returns. The shorter bright-line test that has recently prevailed for new builds (five years) versus existing properties (10) may have also been a factor in the price premium, Davidson says.

With that in mind, it’s no surprise CoreLogic Buyer Classification data shows that mortgaged investors (and first home buyers) have been taking a rising share of new build purchases over time.

2. NZ per cent share of new-build property purchases (Source: CoreLogic)

Looking ahead, Davidson says the new-build premium could start to erode again in the next year or two.

For a start, like in 2009-11, with building work slowing and construction costs now much flatter, there’s likely to be less heat in new-build pricing.

“On that note, there also appears to be some difficulties for developers in securing pre-sales for their new-build projects, possibly hinting at some near-term discounting.”

House listings

Meanwhile, more listings coming to the market may also mean prospective house buyers can already find what they want amongst existing stock.

In addition, mortgage interest deductibility is set to even out regardless of property age, at 80 per cent now and 100 per cent from April 1 next year. At the margin, this also erodes the benefits of a new build relative to existing for investment buyers.

“There is still likely to be a reasonably persistent new-build premium through time, simply reflecting their reduced maintenance costs and higher quality. On top of that, the loan-to-value and (pending) debt-to-income ratio rules will still favour new builds, meaning people can more easily access them with smaller deposits/larger loans, even though the tax advantages will have gone.”

He says ultimately whether new builds cost a little or a lot more than existing properties, the bigger point is that the country simply needs more of them in future to cater for population growth and to try to keep a lid on housing (un)affordability.