Why do new build properties cost more and how much more should you pay ?

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It goes with out saying that you will pay more for a new build property than a second-hand property.  After all, you pay more for most things that are new, be it a new car or new furniture.  Of course there are exceptions such as antiques or fine art, but these are the exceptions, not the rule.

In property terms, this is called the ‘new build premium’.  There are practical and market factors that influence how much that premium will be. So whether you’re investing in Australia, the UK, New Zealand or another developed economy the same logic applies.

Why do you pay more for new build properties?

  • New buildings are more modern and have newer features, such as bathrooms and kitchens. Whereas second-hand properties are more dated and generally require capital to be spent on them to be brought up to date.
  • They are more efficient and therefore have much lower running costs.
  • Most new builds have insurance which protects buyers against defects, for example in the United Kingdom new build property will come with a National House Builders Council (NHBC) (or equivalent) 10-year building warranty.
  • Many new build properties come with amenities such as gyms, outdoor areas, and other facilities which owner occupiers are willing to pay more for.
  • There is less risk of major defects which may occur such as subsidence or termites.
  • Many countries have schemes designed to help first time buyers get on to the housing ladder and these generally are targeted on new build property.  This means that first-time buyers have more capacity to pay more as they can borrow more money for new build property.
New build properties under construction

So how much is the new build premium?

The new build premium is not a fixed amount.   It is a premium which shifts with the market cycle. Very simply you should focus on expansion and contraction.

Expansion – As the economy expands, more development takes place and there are more purchasers in the market.  As the demand increases, so does the new build premium.

Contraction  – As the economy contracts, the real estate market contracts and demand decreases.  Developers have to a) moderate their prices to sell property or b) build less so they do not create an oversupply of new property in the market.  But, it’s not possible for developers to simply turn off supply, so they have to reduce prices in order to sell, meaning the new build premium is smaller. 

The table below shows the new build premium paid for new properties sold in the UK between 1960 and 2020. Over the past 60 years the new build premium ranged from 2.1% in Q1 2015 to 32.8% in Q1 1982.

So the new build premium therefore depends on where we are in the Residential Real Estate Market Cycle.  Successful investors know what the market is doing by tracking economic, demographic and market data, so that they know when new build premiums are low or very high. 

Make sure you do the same, by tracking and monitoring independent data. If the market is at a point where the premium is very high DO NOT BUY NOW! Wait. The premium will contract again. If you’re desperate to buy at that particular point in time, look at other countries. Their real estate cycle could well be at a different point where the new build premiums are lower. This is why successful investors don’t just have a handle on one particular market, they monitor multiple markets to ensure they invest with confidence, knowing they don’t buy when the premiums are at their highest.

If you’re an offshore investor, it’s almost always better to pay the new build premium, rather than invest in second hand property. Read more….