Is it cheaper to buy a house or to build one?

Skyrocketing house prices mean the age-old question of whether it is better to build a new home or buy an existing one has become more pertinent than ever.

In the past, the choice was often guided by the desire to create a brand-new home to individual specifications. Factors such as location, proximity to workplaces and schools, and heritage considerations counterbalanced that.

But over recent years, as the country’s housing supply shortage became more pronounced, incentives to build or to buy a new build have multiplied.

It is easier to get a loan for a new build, for example. That is because the Reserve Bank’s loan-to-value ratios, which limit bank lending to low-deposit borrowers, do not apply to new builds.

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They are exempt and the rules do not prescribe the size of the deposit required for one. Many banks have specific lending options for building a house.

The Government’s new interest deductibility policy for investors also exempts new build properties, which has made them even more attractive.

But the question of whether it is cheaper to build and buy new or to buy an existing property, which is ready to go on purchase, remains.

After a year of widespread price growth, median house sale prices have increased significantly everywhere in the country.

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According to the latest Real Estate Institute figures, the national median national house price was $850,000 in August. In Auckland, it was $1.2 million, while in Wellington it was $875,000 and in Canterbury it was $619,000.

While Auckland and Wellington have the highest prices, Bay of Plenty, Tasman and Waikato all have median prices over $750,000 at $840,000, $800,000 and $780,000 respectively. West Coast had the cheapest median at $300,000.

So how do build costs compare? New figures from Stats NZ show the national average cost to build per square metre was $2325, in the year ending June. That figure does not include land, design or consent costs.

Stats NZ puts the average size of all homes consented at 155sqm in 2021, which makes the build cost of a single storey, 155sqm home $360,375. But land, design and consents costs, and other fees, come on top of that, and they can be highly variable.

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Using this formula to look at different regions, Auckland’s sqm cost was $2319 which equates to an average build cost of $359,445. Wellington’s square metre cost was $2604 and Canterbury’s was $2089, which put their average build costs at $403,620 and $323,795 respectively.

Canterbury had the cheapest average cost, followed by West Coast with a $2118 a square metre cost and an average build cost of $328,290 and then Taranaki with a $2147 a square metre cost and an average build cost of $332,785.

In contrast, it was most expensive in Otago where the square metre cost was $2707 and the average build cost was $419,585. Hawke’s Bay was second with a square metre cost of $2650 and an average build cost of 4410,750, while Wellington was the third most expensive.

AUT construction professor John Tookey says the actual costs will depend on what type of build is being done, with a single storey house on a flat section costing much less than a multi-storey house on a sloped section.

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If someone wants to do a more upmarket build, the build costs will rise exponentially and will get more expensive depending on the design and how lavish the requirements are, he says.

“But the big cost is the cost of the land and the amount of work that the land requires to be made ready for building. That is where cost variations for building in different regions and on different types of land emerge.”

Historically, it was more expensive to build from scratch than to purchase an existing property, but Tookey says currently there is not a big residual difference between the two due to high commodity prices.

Information from CoreLogic provides some evidence of that. It shows that in 2021 buyers paid a national average of $829,747 for what are classified as new builds, compared to a national average of $889,055 for existing properties.

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CoreLogic chief property economist Kelvin Davidson says while it is a difference of about $60,000, last year the figures were about $621,000 for a new build and $739,000 for an existing property which is a gap of about $118,000.

That means the average price paid for new builds has risen faster than the price for existing properties lately, although it is still lower, he says.

“New-builds will tend to be smaller than, or different to, existing properties but that aside, this trend is certainly consistent with the rising construction costs that we’re seeing.

The CoreLogic information also shows that in Auckland and Wellington new builds still cost less.

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In Auckland, the average new build price this year was $997,478 as compared to $1,270,949 for an existing property. In Wellington the difference was even starker, with an average new build price of $763,853 versus $1,071,292 for an existing property.

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But Master Builders chief executive David Kelly says while new build prices have gone up, due to rising land prices and increases in material and labour costs, they have not done so as much as prices for existing stock.

It is hard to know for sure if it is cheaper to go for new builds because multiple variables make it difficult to compare, but he thinks new builds remain cheaper than existing properties.

“The price of existing houses has just increased so much, beyond the norms of inflation. So if you can get a builder and land, the new build price looks attractive in comparison, even with the current uncertainty of some costs.”

There are other attractions with new builds too. The drive towards greater intensification of housing means more townhouses and terraced housing is being built.

Kelly says this not only provides a wider range of choices to buyers, but the smaller-sized properties involved offer more reasonable prices too.

“There are other benefits with new builds. They meet the current building code and are healthier homes as they have to be properly insulated and often have features like double glazing. They cost less on the maintenance and repair front too.”

These features add to the value of a home and should be taken into account when considering the ongoing costs of owning a home, he says.