FEATURE ARTICLE: HOUSES IN SOUTH AUSTRALIA


THE COST OF BUILDING A DREAM

Introduction

Home ownership remains part of the great Australian dream but rising property prices are perceived as one of the main components making that dream harder to realise. Many Australians view building their own home as a way of controlling not only what their dream home looks like but also the costs of attaining that dream. How much does it cost to build a house in Adelaide? Using data available in the ABS publications House Price Indexes: Eight Capital Cities (cat. no. 6416.0) and Building Activity Australia (cat. no. 8752.0) changes in the cost of building a house in Adelaide can be assessed from two differing perspectives.

Focusing firstly on the Housing Price Index for Adelaide, this article will show that, according to this measure, the price of building a new house has increased by almost 80% over the period 1993-94 to 2008-09 (using 1993-94 as the base year). The second measure assessed is the average completion value of a new house as determined by data collected through the Building Activity survey. Under this measure the average cost of building a house in the Adelaide Statistical Division has increased by almost 166% over the same period. Data for both measures is also compared to changes at the national level over the analysis period.

With fundamental underlying differences between the measures, different results were expected. Following a brief discussion of the reasons for these differences a study of the average size of new dwellings is undertaken to determine whether or not the larger movements in the average value a new house is being driven by a propensity to build larger homes.


House Price Index (HPI)

A price index is concerned with measuring pure price change. It seeks to eliminate that element of price change which is the result of a change in either the quantity or quality of the goods or services being measured. The ABS compiles a House Price Index (HPI) for established houses; however it is not appropriate to use in this article as it refers to new houses sold as a house/land package as well as second-hand houses (plus land) and this analysis seeks to exclude land.

More appropriate for this purpose is the HPI for project homes. Project homes are dwellings available, in a fixed range of designs, for construction on an existing block of land and thus movements in price relate only to the cost of constructing the dwelling (excluding land). With only a fixed range of designs on offer the quality of the homes remains consistent between periods. For the remainder of this article use of the term HPI will refer to the HPI for project homes unless otherwise specified.

After rebasing the series to a base year of 1993-94, the graph below depicts the movement in the HPI since that time for both Adelaide and Australia (as represented by the weighted average of the eight capital cities). It should be noted that the index measures price movements over time in each city and makes no attempt to measure the difference in price levels between cities.

For most of the period between 1993-94 and 2008-09 movements in the HPI for Adelaide closely mirrored those at the national level. By 2008-09 the HPI had increased 79.3% for Adelaide and 80.1% at the national level. The greatest increase occurred in the period immediately following the introduction of the GST (i.e. between 1999-00 and 2000-01) when the index for Adelaide rose by 13.2 points and the 13.4 points for Australia. In the post GST era the value of the index for Australia has, on average, been increasing at a slightly faster rate per year than the index for Adelaide (7.4 index points per year as compared to 7.2 index points).

Average values of completed housing

Whilst building a project home appeals to some, others find the limited range of designs too restrictive and prefer to have more input; they want the option of adding rooms, moving walls, upgrading the quality of materials used etc. Every change affects the final cost of the house and in addition makes each house unique.

An average value for constructing a new house can be obtained from the Building Activity Survey by dividing the total completion value of houses for a particular period by the number of houses completed in the same period. The resultant value is based on the market or contract prices of jobs including site preparation costs but excluding the value of land and landscaping. In addition to average values for South Australia and Australia, an average has also been calculated for the Adelaide Statistical Division (ASD) which will facilitate the comparison of this measure with the HPI results in a later section of the article.

From the graph below it can be seen that over the period 1993-94 to 2008-09, the average annual values of completed houses for the Adelaide Statistical Division (ASD) and South Australia were very similar although both were consistently lower than the national average. In 1993-94, the average value of a new house in the ASD ($77,671) was slightly greater than the South Australian average ($75,780), but 14.3% below the national average ($90,600). By 2008-09, the average value of a new house in the ASD had increased by 165.7% to $206,346 but remained 19.8% lower than the national average of $257,268 for that year. As was the case with the HPI, changes in the annual average value of a completed house occurred at a faster rate in the post GST era.

Comparison of the two measures.

By indexing the average values of completed houses to the 1993-94 value it is possible to compare movements in both series simultaneously. As depicted in the graph below, the rate of growth in the HPI for Adelaide over the analysis period was substantially lower than the rate of growth in the index for the average value of a completed house. This is particularly evident between 2001-02 and 2008-09 where the HPI increased by 46.2 index points whilst the index of average values increased by 107.7 index points.

Given the underlying differences in these measures it is no surprise to find that the movements in price for each are markedly different. Whilst the HPI for project homes is a constant quality measure of changes in the price of a particular type of new house with virtually identical characteristics over consecutive periods, the average value of a completed house is determined from the aggregated values of all houses completed in a period regardless of type or physical characteristics. Thus the completed houses group would comprise a wider range of houses and changes in the average price of a completed house would reflect not only pure price change but also price changes over time due to changes in the physical characteristics and composition of dwellings constructed. Some examples of these characteristics include materials used in outer-wall construction, overall size, number of rooms, number of bathrooms, additional fittings etc.


Average size of completed houses

One particular physical characteristic that varies greatly across new houses is their size and there is a school of thought that suggests increases in the average value of a completed house could be due to the growth in house sizes over time. The impact of house size on price can be assessed through a study of the average floor area of new houses.

Over the period 1993-94 to 2008-09, the average size of a new house in Australia increased from 188.7m2 to 245.3m2. For the first 6 years of the analysis period the average size of a new house in the ASD also increased (from 182.3m2 in 1993-94 to 217.0m2 in 1998-99) and was never more than 15m2 below the national average. Over the ensuing decade, however, the average size of a new house in the ASD has gone against the national trend and fallen by 9.2% to be 197.0m2 in 2008-09. This is 48.3m2 below the national average for that year.

These results support recent media commentary suggesting that South Australians are building smaller houses (AdelaideNow Oct 10 2009). Factors which may be influencing this trend include smaller blocks of land; a desire to create more 'efficient' houses in terms of economic and environmental considerations i.e., larger houses cost more to heat and cool etc.; the type of dwellings being built (e.g. older houses on larger blocks being demolished and replaced with multiple (smaller) dwellings); and the ageing profile of our population (i.e. possible increasingly popularity of independent living dwellings in 'retirement communities' which allow older people to down size whilst maintaining their independence). An investigation into these factors is beyond the scope of this article.

Using the floor area values to determine an average cost per square metre shows that despite the size of new houses in the ASD decreasing over the last decade, the cost of building a house has increased to be approximately level with the national average in 2008-09 ($1,047/sq. m for the ASD and $1,049/sq.m for Australia).

From this analysis it seems that factors other than floor area (such as the quality and quantity of materials, fixtures and fittings) are the driving forces behind the rising cost of building a house in Adelaide.


SUMMARY

This article has shown that the cost of building a house in Adelaide has increased substantially since 1993-94. The cost of building a 'basic' house (as measured by the HPI) has increased by 79.3% whilst the average cost of building based on the average value of all completed houses in a given period increased by 165.7%. The costs generated by both methods were lower than the respective national averages.

Despite a popular belief that house prices are increasing in part due to people building larger houses, this analysis found that house sizes have been falling in Adelaide over the last decade. Analysis also found the cost per square metre of building a new house in Adelaide to be almost the same as the national average.