Is it more expensive to build than to buy? | Housing Crisis 2016

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03 March 2016

Is it more expensive to build than to buy?

Tom Parlon, Director General of Construction Industry Federation on GE16 Election promises: “During the election, all political parties made promises in relation to jobs, housing and infrastructure.  Currently, the cost of doing business means that construction companies will not be able to meet the promises made by candidates.  This has the potential to stymie economic growth across the country.” (see link here)

There have been numerous housing cost estimates and some commentators incorrectly assume a 20% cut in floor area will convert to a pro-rata reduction in sales value. The question for the industry is what does it cost to build a typical estate house and does reducing size have any impact? Is there  a benchmark for house costs? 

In this post we asked architect Maoilíosa Reynolds if the cost of building a typical house in Ireland is still more expensive than buying in 2016.

TYPICAL HOUSE CONSTRUCTION COST & SALES VALUE 2016

Quantity surveyor firms produce useful construction cost tables on an annual basis. However it would appear that industry stakeholders have repeatedly quoted a 2012 Walsh Associates Cost estimate for a 110Sqm house commissioned by the Irish Home Builders Association. 

This revised 2016 cost appraisal is based on this detailed costing, with inflation between 2012-2015 (end) assumed of at 4.3%. The 2012 Report confirmed a “base build” construction cost of € 91,598 and a projected sales value (including site value & vat) of € 248,685 (See Link HERE:)

As this is the most quoted house cost breakdown let’s look at updating it to 2016.

Detailed 2016 cost for a typical 110Sqm house 

Revised costs below include the following items previously excluded (or reduced) in 2012 Walsh Assoc. version:

  • Revised site cost are now included. The cost per acre is based on the purchase price of lands in Cherrywood at € 625,000 per acre (Hynes site), assumes a density of 15 houses per acre and a € 41,670 cost per site. Land values noted in 2012 Walsh costing were € 25,000. (note recent sale to Cairn Homes in Cherrywood suggests a site cost of € 71,000 per unit).
  • Developer’s profit on total net sales including site cost of 15%.
  • “Additional supervision” and other additional BCAR costs (admin/ defensive specifications) for contractors and professionals of € 25,000. This includes increased phasing carry cost on the basis of all siteworks being completed before first phase sells then carried for remainder of project (due to BC(A)R SI.9).
  • Further increase in Part L costs since 2012 (assumed € 5,000)

The revised costing is for a typical 3 bed semi-detached 110 Sqm house in a scheme (1- 2 acres) with less than 50 units, completed in three phases with an 18 month construction programme. The revised 2016 construction cost of a typical 110sqm house is € 100,402, and the projected total cost (sales price) is € 327,262. Summary breakdown as follows*:

total cost schedule 2016.pdf [Converted]

*For detailed breakdown see link at end of post.

For speculative housing many items are fixed per unit irrespective of size. These include professional fees (for statutory permissions), fees for construction and other stages (architects, engineers and surveyors), testing (acoustic and soil) and site purchase/ development costs. There are financing costs for the total development, site purchase, carry cost and phasing, which is a particular issue with BC(A)R SI.9 bulding control procedures.  On completion there are sales costs, legals, marketing, developer’s profit or margin (minimum 15%) and VAT on sales at 13.5%. The “base build” cost of a typical dwelling includes walls, floors and roof and is floor area dependent.

The remainder for finishing out- heating, electrics, bathrooms, kitchens, windows & doors along with siteworks, demolition, roads, paths and drainage are primarily fixed costs irrespective of floor area.

The “shell and core” of a house excludes heating and water services, bathrooms and kitchens. Removal of these items (costing € 21,500) from the “base build” construction cost gives an building envelope cost of € 78,958. Based on this figure an 10 sqm floor space has a € 8,000 “base build” cost and equals to a total cost (sales price) of € 12,000 (similar to recent SCSI cost estimates).

Possible Cost Reductions:

Reducing floor area is the least effective way of reducing costs.

Possible areas where greater reductions could be achieved are listed in order of magnitude. Most of the following headings could be significantly reduced by Local Authorities direct procurement of social housing projects:

  • Reduction of site cost (Co-Housing initiatives): € 41,600
  • Removal developer’s profit: € 37,613
  • Re-introduce Local Authority Inspections, exempt SI.9: (8,500+ 6,000+10,600)= € 25,100
  • Reduce VAT on sales (from 13.5% to 9%) -4.5%= € 12,975
  • Remove Part V (unnecessary if scheme is 100% local authority social housing): € 10,000

Removing 10 Sqm of floor area reduces the total costs (sales price) price by 3% translating into a € 55 per month saving at current lending rates, a small price to pay for the equivalent of an extra bedroom. Reducing Vat could save slightly more at € 13,000; removing BCAR could save over € 25,000 per unit. Addressing these two cost elements could reduce costs by three times as much as removing 10 Sqm floor space. Bigger dwellings, better performance at no lower cost.

Conclusion

Local Authority direct procurement of housing has the potential to yield improvements in both space standards and performance while delivering massive savings when compared to the equivalent speculative house sales price. Generous space standards and high standards can be delivered for social housing at a much lower cost, affordable levels. The Department of the Environment and Local Authorities should be looking at reducing costs rather than space standards. Reduce red-tape, lower costs and improve quality.

In Q4 2015 the average asking price in Dublin was € 306,540, elsewhere the average was € 166,677 (see link here). Efforts at reducing net floor area, like 2015 DECLG Minimum Standards, are the least effective method for reducing costs.

Supply, affordability and cost remain major problems for 2016.

The above is based on a submission made to Dublin City Council on the current Development Plan “The Cost Impact of adding +10 Sqm to a Typical House in 2015” of by Maoilíosa Mel Reynolds MRIAI RIBA on 8th December 2015. For detailed breakdown of costs see Appendix B extract (See Link HERE)

Other posts of interest:

Is apartment building viable in Dublin in 2016?

BCAR “is estimated to add about €25,000 to the cost of each home” | Ronan Lyons

Environment department doesn’t have a clue on housing | Dr. Lorcan Sirr

“ BCAR… is one of the key reasons behind the absence of new housing supply” | BARRY COWEN (FF)

BC(A)R SI.9 has added + 5% to Residential Costs | SCSI / DK

One thought on “Is it more expensive to build than to buy? | Housing Crisis 2016

  1. Michael Tweed

    Whatever about the argument over dwelling sizes, in the urban centres only fools don’t accept that apartments are the appropriate dwelling types. While I see numerous tower cranes rising over Dublin again virtually none are there to build apartment blocks. Part of the reason for this must be the onerous nature of compliance sign off on Building Regulations under BC(A)R requiring the issue of a Certificate of Compliance before a building can be sold, occupied or used. This is ok if you are putting your capital investment into a large empty shell commercial building – build the shell, sign off and then begin letting the space. That’s not how apartment developments work. Imagine an apartment development of around 100 apartments or so, the sort of scale of building you would expect to provide a decent return on investment. Every single apartment has to be complete along with all the landscaping, carparking etc before the Certificate of Compliance can be signed off. Only then can a return on capital expenditure start with the first apartment sales. This results in a developer having to commit to expending anything up to perhaps €30,000,000 before a single cent can be recouped with a build programme of anything from 2 – 3 years. If the margins per apartment are tiny the developer will only be in profit after the sale and receipt of the full asking price of perhaps the 90th or 95th apartment! Why bother taking such risks for so little return? Not alone that but they’ll be prime targets for the begrudgers queuing up to tell them they’re building shoe-boxes?
    Our housing crisis is a problem of complexities which need analytical, logical, non-party political, non-agenda thinking to solve. Our housing crisis is going to get an awful lot worse before it get’s better! We’d be well advised to get our thinking caps on – and quickly!

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