Lie #1: I paid for my land
Lie #2: The rebuild cost of my house is much higher than what you say, so only a small part of the total current value relates to land.
I'm not disputing that people paid for the cost/value of the building, I am talking about the land element.
Having argued over the numbers with Bayard, this is what it boils down to. Assume average house price has gone up from £60,000 to £210,000 and that RPI inflation was 50%:
My view:
1994
Average price - £60,000
Build cost/value - £54,000
Balance is land value - £6,000
2014
Average price - £210,000
Build cost/value - £81,000 (£54,000 + 50% inflation)
Balance is land value - £129,000
Average build costs are £900/square metre (£800 to £1,000) and average new built semi-detached is 88 square metres.
Semi-detached houses built twenty years ago were a bit larger but the fabric of the building has depreciated a bit, cancels out.
If we index up the original £6,000 we get £9,000, meaning that people who bought in the good old days when houses cost about three times the gross average salary (from 1945 to 2001, ignoring a couple of spikes) only paid for 7% of what the land is now worth.
Bayard's view:
1994
Average price - £60,000
Build cost/value - £40,000
Balance is land value - £20,000
2014
Average price - £210,000
Build cost/value - £60,000 (£40,000 + 50% inflation)
Balance is land value - £150,000
Even if Bayard is correct, that would still mean that older owners only paid for one-fifth of the current value of the land on which their house sits.
The rest was a free gift, kindly engineered for us by the UK government when we had rent controls and mortgage restrictions etc, a free gift which the neo-liberals took away again from the 1980s onwards, with the Boomers and Homeys cheering them on.
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Predictably, Sobers in the comments:
If you can build a 3 bed semi for £81K, you better start a property development company, you'll make a killing.
For a undeveloped but serviced site to finished house ready to live in, you'd need £125K minimum, assuming you aren't doing the work yourself. My parents have just had a cottage in rural Wales (so cheaper builders than England) completely renovated for about 60K, labour and materials. Thats new roof, new doors and windows, back to bare walls, complete new everything inside. If you had to start from an empty site you could more than double that easily.
I am not interested in rebuilding cottages in Wales. I am interested in the average selling price of an average 3-bed suburban or urban semi.
If Sobers is correct and the current rebuild cost of such a home is (say) £120,000, indexed backwards to 1994, it would have cost £80,000.
Seeing as the average house price at the time was about £60,000, this would suggest that builders either made a loss of £20,000 on each home or that they paid negative £20,000 for the land. We can rule out both of those.
So his figures simply do not add up and can be ignored, and if he were correct, it would imply that older home-owners actually got a free gift of £20,000 when they bought their home, which nukes the traditional Homey nonsense of "I paid for my land".
Friday, 1 August 2014
They can't have it both ways (part 2)
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If you can build a 3 bed semi for £81K, you better start a property development company, you'll make a killing.
For a undeveloped but serviced site to finished house ready to live in, you'd need £125K minimum, assuming you aren't doing the work yourself. My parents have just had a cottage in rural Wales (so cheaper builders than England) completely renovated for about 60K, labour and materials. Thats new roof, new doors and windows, back to bare walls, complete new everything inside. If you had to start from an empty site you could more than double that easily.
I have previously done those self same sums.
In the past, the late Mr Lola Snr, did the same sums when selling houses and buying land. That is when you bought the site at day 1 in yr 1 you knew the plot price. It then may take two years to fully build out and sell all the properties. By the end of yr 2 the plot price will have increased so your 'profits' from the sale of properties gradually reduces if the property price does not rise, as it must if you want to replace your land. Building costs never rose by the same amount and were usually no more than RPI and were sometimes negative. Clearly over a two year build house prices at sale at say 6 months after day 1 yr 1 need to be higher than your original plot price calculations and higher again for the last house to be sold. But none of that increase is 'profit'. It all has to be ploughed back into buying more land.
@Sobers
http://www.homebuilding.co.uk/advice/costs/how-much-project-cost-one
Say 800 / sq m
Say 75 sq m
= £60,000.
And....?
"If Sobers is correct and the current rebuild cost of such a home is (say) £120,000, indexed backwards to 1994, it would have cost £80,000."
You can't index back like that, the Building Regs have changed significantly since then, all imposing more costs on the builder. I have real life experience of building things and what it costs and know you can't build a house from scratch for 80K.
L, ta for back up.
Sobers, keep digging.
I have always said that the depreciated bricks and mortar cost/value of an average three-bed semi was about £54,000 twenty years ago and is about £81,000 now. Increases with inflation, like Lola said.
Can you please put actual figures on your estimate for build costs then and comparable build cost for a house of similar quality now?
There are two kinds of reg's - those which increase or improve standards (for which we see fuck all evidence) and silly regulations which merely increase bureaucratic costs and do not add to value of finished home, merely decreasing the land price paid.
You can't have it both ways, although as a Homey you would dearly love to.
Your basic house 20 years ago may not have had central heating. It would have had only a basic bathroom and kitchen - you supplied your own cooker for example. It probably had little insulation, a basic single garage, minimal power points and lighting, single glazing and few of the expensive fittings and designer interiors you expect to find nowadays.
The comparison is rather unrealistic.
When you "pay for your land", you are placing a bet that your land will continue to be serviced by infrastructure, mostly paid for by the tax payer. Where, for some reason, this does not happen, the value of your land drops like a stone.
A recent example was the Somerset Levels, where inadequate maintenance led to flooding. What is the land worth now? Another potential example was the whole of Devon and Cornwall west of Exeter. The only railway closed in early February at Dawlish, again due to the sea wall getting washed away. It was reopened two months later, due to heroic efforts by Network Rail engineers. What would have happened to land values in Devon and Cornwall if it had not been?
The subject is discussed here.
The link didn't work.
Try this
W42, true, but room sizes are smaller, walls are thinner, timbers less sturdy and white goods are much cheaper nowadays.
In any event you have not answered the question as you have not given your estimate of build costs twenty years ago and build costs of an identical building now.
It's a perfectly simple question but the Homeys always refuse to give a straight answer, don't they?
Phys, we call it "community generated value" and the Homeys call it "location, location, location".
The Homeys celebrate the latter but deny that the former exists. It's the same thing.
Basic build costs per m2 are about £1000-1100, if employing an all in contractor. This is easily verifiable anywhere on the web. Cheaper obviously if doing more of the work yourself, but we're talking replacement cost here, not a self build job.
Average size of a UK dwelling is 91m2 (source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/6703/1750754.pdf) that puts the rebuild costs at c. £100K, which is does not include VAT on the labour cost, so you can add 20% to that if using a VAT registered builder. So £125K for the average UK home is pretty much spot on.
I repeat, if you can build a house for less, come and see me, I have a a project on the go at the moment to fund and build a new cricket pavilion, its about 100m2 and I can't get the costs below £100K. If you can do it for £80K I'll be all ears.
S, all right.
Build cost £1,000.
Size 90 sq m.
Total £90,000 (including developer's profit).
That twenty year old house is wearing out, the roof is twenty years closer to needing replacement, the builder's guarantee has expired etc, knock off 10% gets us back to what I first said £81,000.
Forget the VAT, residential construction is VAT zero-rated (builder does not charge VAT on the house but can reclaim nearly all input VAT).
I thought you held yourself out as an expert and you don't know that residential is VAT zero rated? Hmmm.
So we index that £90,000 back to 1994 and the build cost was £60,000 and the land was close to being free.
Don't tell me that building standards have improved massively over the last 20 years because they haven't.
"W42, true, but room sizes are smaller, ... white goods are much cheaper nowadays."
Yes I agree, but that's another part of the reason why direct comparisons are so difficult to make.
Mortgage rates are also an important issue. Most ordinary people use a mortgage and my last loan started at 10% - thus the amount to be paid over the 25 years was almost doubled compared to today's lower rates. For most folks it's the monthly outgoing that determines affordability (or lack of).
Vat is also still an issue because (unlike France)it is levied in full on renovations and extensions. The original sections of my house (bought as a doer upper)were technically vat free (although all the transfer cost etc wasn't of course) but doubling it in size and completely renovating it (half the cost to me) to make it habitable were all vatted.
W42, VAT is a shit tax, agreed.
But which part of my line of argument are you arguing against?
1. Pre-2001 purchasers who paid about three times average income paid very little for the land element.
or
2. Build costs are a relatively small part of today's selling prices?
Community created value is like water on parched ground. It sinks in and vanishes if it is not continuously replenished, mostly at taxpayers' expense.
It is not something you can buy with a one-off payment.
Phys, agreed, but taxpayer funded stuff (roads, refuse collection, police etc) is only part of it.
A chain is only as strong as its weakest link, so you need employers and employees, local shopping and leisure opportunities, you need mains water gas electric broadband and mobile reception, breathable air.
You can't really rank them in order of importance as they are all important.
All of which is "the community" and all of which needs to be replenished etc.
W42, yes interest rates used to be higher.
But going by my figures, what is worse, paying 10% interest on a loan to buy land of £6,000 (indexed up to £9,000) or paying 4% interest on a loan to buy land of £129,000?
I was one of the lucky ones who did the former and I'm not complaining.
"Bayard's view:
1994
Average price - £60,000"
Is this new-build only? If it includes second-hand houses, you'd have to factor in the depreciation on the house. Houses depreciate, land appreciates, so, for a second-hand house, the brix 'n' mortar can be bought for a lot less than the build cost.
B, between 1953 and 2001, the average price paid for all housing, new or old, was about three times wages. I just chose 1994 as a random date when average house price was about £60,000.
I read somewhere that there is (or was) a premium for new houses of 5% or even 10% which rapidly evaporates. That is not land value, that is builder's profit.
Of course there were plenty of marginal situations where you could buy houses for less than the build cost. So the land was free (or at least very, very cheap) was part 1 of my whole argument.
£6000 to maybe £10000 per plot in the gold days is about right, from memory.
£6000 to maybe £10000 per plot in the gold days is about right, from memory.
"where you could buy houses for less than the build cost. So the land was free (or at least very, very cheap) was part 1 of my whole argument"
You misread me. I was saying that you can nearly always buy the bricks and mortar (not the bricks, mortar and land) for less than the build cost, because houses, like everything else, depreciate until they become old enough to have scarcity value.
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