Cheaper to buy than build

Cottesloe has seen its median price jump by more than $380,000 over the past 12 months. Interestingly however, many of the very affordable suburbs are also seeing big jumps. Bibra Lake had a median of just $575,000 last year and now has increased to $690,000 and is one of the strongest growth suburbs in the city. In percentage terms, it is moving far quicker than most of the premium suburbs.

The big jump in pricing in these affordable suburbs is in part being attributed to interstate investors. While difficult to track, anecdotally, there have been many reports of many of these buyers, paying well above market, sometimes sight unseen. There are likely many reasons for this activity - rental yields are high and the relatively low price makes it easier to borrow. Another driver, however, is that construction costs in Perth have rapidly outpaced house prices over the past two years. Buying an established home in these low cost areas is now looking like good value.

While house prices have increased by 20 per cent in Perth over the past two years, construction costs have increased by 40 per cent. Investors and owner occupiers that typically would have looked at Perth’s affordable house and land market are being driven to the established market. Quite simply, for many buyers house prices will need to keep rising to make the construction of new homes a viable alternative.

What's happening in Perth is consistent nationally. Construction costs have risen so much that in many places replacement costs are now much more expensive than established homes are currently selling for. Nationally, capital city house prices have risen by 11 per cent while construction costs have risen 27 per cent. Either construction costs have to come down significantly, or established houses need to rise, to increase the flow of money into building new homes. With construction costs moderating, but not dropping any time soon, it is looking like prices will need to continue to rise to ensure greater levels of housing supply.

The Federal Government Housing Accord plans to deliver 1.2 million new homes over the next five years. While there are many challenges to meeting this goal, high construction costs will ensure that this doesn’t happen, making building a lot of new homes unviable. And with buyers unable or unwilling to pay so much more for new homes, it will continue to push more into the established home market. Another reason why house prices will continue to rise in 2024.