Is It Cheaper to Build or Buy a House in Australia?

Building Is Not Automatically Cheaper Than Buying an Existing Home

A new build may initially appear cheaper because advertised building costs may be below established home prices in the same general area. However, the house building work is only one part of a construction project, and the cost of vacant land needs to be included before the two options may be compared properly. Buying an existing home generally gives you a more complete purchase price at the start of the buying process. With a build, the final amount may involve a land purchase, construction costs, site works, utility connections and other expenses that do not always appear in the headline building price.

Land and Construction Costs Shape the Final Price of a New Home

The total cost of a brand-new home usually starts with two major expenses: the land value and the building costs. Lower land prices may make building more competitive in some areas, while limited land supply or expensive vacant land may make a house and land package considerably more costly. Land availability also varies across Australia. Established suburbs may have little vacant land, while newer areas on the edges of capital cities or in regional locations may offer more building opportunities. A buyer seeking a particular established suburb may find that buying an existing house could be a more realistic option, depending on land availability and overall costs.

The Advertised Building Price May Not Reflect the Final Cost

A builder’s advertised figure may cover the main construction work without covering every cost needed to make the property ready to live in. Buyers considering house building may find it useful to understand exactly what is included in the proposed contract. Additional costs may include:

• excavation and site preparation

• soil testing or retaining work

• utility connections

• driveways, fencing or landscaping

• building permits and items excluded from the contract.

Some additional expenses may be substantial depending on the site and project. Looking closely at the full list of inclusions and exclusions can provide a better guide than focusing only on a builder’s starting price.

Fixed Price Contracts May Improve Cost Certainty

Fixed price contracts may make some construction costs easier to budget for because specified work is agreed at a set contract amount. They do not necessarily protect a borrower from every expense, especially where an item falls outside the contract or a variation is requested during the building process. As part of a construction project, buyers may consider what is fixed, what is estimated and what circumstances could result in additional charges. Some borrowers may consider allowing room in the overall budget for unexpected costs that could arise during the building process.

Buying an Existing House Offers a Different Type of Cost Certainty

When buying an existing home, the buyer generally knows the agreed property price before finance is finalised. There may still be additional expenses, but many may be identified during the buying process rather than arising gradually during construction. An existing property may also be inspected before purchase. Building and pest inspections may identify structural or maintenance issues that could require spending after settlement, helping a buyer consider those costs before committing.

Established Homes May Still Come with Hidden Costs

Buying an established home does not mean there will be no unexpected costs. An older existing house may need repairs, replacement appliances, painting, roofing work or other maintenance after purchase. Upfront and early ownership costs may include:

• conveyancing or legal costs

• building and pest inspections

• stamp duty costs where applicable

• moving expenses

• immediate repairs or renovations.

Eligible buyers may have access to stamp duty concessions depending on the rules in their state or territory. These concessions may reduce upfront costs, but current eligibility and property limits should be confirmed before they are included in a budget.

Construction Loans Work Differently from Traditional Home Loans

Financing a build is usually different from taking out a home loan to purchase an established property. A construction loan is generally structured, so funds are released in stages as the building reaches agreed points in the construction process. Instead of the entire construction amount being provided at the beginning, payments may be made progressively to the builder. The lender may require documents, valuations or other checks before releasing further funds.

Interest Payments May Change as Construction Progresses

Because construction lending is generally drawn down in stages, interest payments may initially relate to the amount already advanced rather than the full approved construction amount. The exact arrangement varies between lenders and loan products. Temporary housing during construction may also form part of the overall budget for some borrowers. If rent continues while the property is being built, those costs could overlap with loan commitments and other building expenses.

Construction delays may extend this period. Weather, material availability, labour shortages and changes to the project may all affect timing, so the expected completion date is only one part of the overall budget.

Lenders Assess the Full Construction Project

A lender will usually consider more than the building contract. The assessment may include the land purchase, construction costs, proposed property value, available deposit, income, existing debts and regular household expenses. Different lenders may also have different requirements for a construction loan. A finance broker may help explain how lenders may assess the project and compare available loan structures, subject to lender assessment and the borrower’s circumstances.

Location Has a Major Impact on the Cost Comparison

House prices and land prices vary considerably between Australian regions, so national comparisons may only tell part of the story. Median house prices in capital cities, regional centres and smaller towns may differ significantly, and land supply is not the same in every market. In some locations, lower land prices may make building more competitive. In established suburbs where vacant land is limited, the land value alone may represent a large part of the total cost.

Comparable Properties Give a More Useful Price Comparison

A useful comparison is based on homes that could realistically meet the same needs. Comparing a small block well outside a city with an established home in a tightly held suburb may produce a large price difference, but it does not provide a like-for-like comparison. Consider:

• preferred location

• suitable property size

• access to work, schools and services

• available land

• likely loan amount and repayments.

This makes it easier to compare the total cost of both building and buying rather than relying only on broad median house prices.

A New House May Have Different Ongoing Costs

A brand-new home may include modern insulation, appliances and energy efficient features that may affect ongoing costs. Depending on the design and inclusions, better energy efficiency may reduce the amount of energy needed for heating, cooling or hot water. Some new houses may also include energy efficient technologies that are less common in older properties. However, energy bills depend on factors including household behaviour, climate, energy prices and the equipment installed, so a new house does not automatically mean lower bills.

An established home may also be upgraded to improve energy efficiency, although those improvements add to the total cost. Comparing the actual condition and energy efficient features of each property may be more useful than assuming one type of home will have lower ongoing costs.

Government Support May Reduce Some Upfront Costs

Eligible first home buyers may have access to government programs that could reduce certain upfront costs or change the deposit required, depending on their circumstances and current rules. Depending on the location, circumstances and current government rules, available support may include first home buyer grants, a First Homeowner Grant, stamp duty concessions or government-backed home buyer programs. The rules vary between programs and jurisdictions. Some assistance may apply to a new house, some to an established home and some to both, with eligibility rules and property value limits often applying.

Government assistance does not necessarily make building or buying cheaper overall. Buyers who meet the current eligibility requirements may be able to include applicable assistance when comparing the actual costs of each option.

Current eligibility, property limits and other rules should be confirmed with the relevant government body before any grant, concession or government-backed scheme is included in a budget.

Home Loan Structure May Affect the Overall Comparison

Two properties with different prices may also require different loan structures. Building may involve finance for the land followed by a construction loan, while buying an existing property will generally use a more traditional home loan structure. The amount borrowed may affect repayments and interest payments over the life of the loan. Interest rates, fees and product features may therefore be relevant alongside the property or construction price.

Building and Buying Suit Different Priorities

For some buyers, building is attractive for reasons beyond the possibility of a lower total cost. A new build may provide more control over the layout, finishes and energy efficient features compared with renovating an existing property. Someone planning a dream home may place a higher value on design flexibility even if building is not the cheapest option. Other buyers may place more value on moving sooner, knowing the agreed purchase price and avoiding a lengthy building process.

Buying may also provide access to established suburbs where new land is difficult to find. Building may provide a brand-new home with fewer immediate maintenance issues, but the buyer also needs to account for construction delays and the additional steps involved in completing the project. The comparison is therefore about both cost and practicality.

The Cheaper Option Depends on the Full Cost and the Location

Building may cost less than buying an existing home in some parts of Australia, particularly where suitable land is available at a lower price and construction costs stay within budget. In other locations, an established home may cost less once land costs, site preparation, building expenses, temporary housing and other construction costs are included. Key factors may include total cost, location, land availability, condition of existing properties, upfront costs, likely loan size and how each option may fit within a buyer’s overall budget. There is no single answer that applies across capital cities, regional areas or individual suburbs.

For the finance side, Eurobodalla Finance can help explain how lenders may assess a land purchase, construction loan or existing home purchase and discuss loan options, subject to borrower circumstances, lender requirements and assessment. Mortgage brokers providing credit assistance must meet applicable regulatory requirements and act in the consumer’s best interests where those obligations apply.

This article is general information only and does not take into account your objectives, financial situation or needs. It is not personal advice. Loan availability, borrowing capacity, government assistance, interest rates and lending requirements depend on individual circumstances, eligibility and lender assessment.