Master Builders want to keep land expensive

Tempestas 13 August 2008 21

ABC news online is reporting that the Master Builders are concerned that if too much land is released then prices might actually fall.

They are then willing to suggest that the cost of building has only increased with the CPI in the last five years, no doubt a comment soon to be withdrawn, as it highlights that they want to keep land prices and their profits high.

Lets see if the Government will reveal how much it is captive to this lobby group and restricts supply!


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Tempestas Tempestas 9:48 am 15 Aug 08

Al I was using numbers plucked from air. I was trying to point out that as a builder you build your profit margin into the price of what you do – ie building, that builders as wannabe developers also make money from the increase in land values is the reason the MBA is having a whine.

If as a builder, you can’t turn a profit from building then get out of the business and find a new way to fund your lifestyle.

Speculation and greed are key factors in land price increases over recent years and complaining about the party being over is a bit rich. Surely you can see that if more land was released, the demand for builders would increase, enabling the market to increase the profit of building. That the MBA is worried about this tells me that they are not interested in building, and would rather make money from speculating.

So as johnboy said at the start – they should be ignored.

Gungahlin Al Gungahlin Al 9:40 am 15 Aug 08

“If you buy at say 200k spend 130k building and sell for 330k”
Tempestas, when was the last time you built? I don’t think you’d be able to build today’s equivalent of an ainslie 2-bed govvie for $130K these days.

JC JC 2:10 am 14 Aug 08

The big problem is the past 8-10 years house prices have increased way too much. The sad thing is many people who own the real expesnsive places are the ones who sold their smaller places for massive gain and have upsized. In short they benifited from the large increase, now the market looks like maybe dropping to balance they are running scared. I am afraid they can get stuffed. They drove the market with greed, so maybe now is the time they pay for that greed.

BTW the used house market drives the price of new houses. As building costs remain reasonably static the rises in new homes is in land. I want to know who the hell is making the profit. Developers, builders, the government or all 3?

Tempestas Tempestas 10:35 pm 13 Aug 08

Noodle

If you buy at say 200k spend 130k building and sell for 330k then you are right, but the MBA doesn’t want prices for land to fall, so why is that? Could it be that many builders buy for 200k sit on it as long as possible, building between other jobs etc and then aim to sell for 450k having spent say 330k (which includes their profit from actually building) and take the extra and buy the next block of land?

If land prices were to fall, then there would be more demand for builders, as more people would be looking to build, people wanting to improve the value of their property would look at more extensive renovations etc, ie the market would enable builders to make more money from building, but that is not what they are saying they want. So is the MBA about builders as professionals building homes or as builders as small to medium scale developers.

Whilst it is true no-one wants to have negative equity, a house purchase is a lot of capital to be using for short term returns – the reason home loans are at reasonably low interest rates compared to credit cards, is that their value *over time* increases. Alan Kohler, Ross Gittins and all the other economic commentators have been very clear in pointing out that prices cannot increase at greater than historical averages for a long period. We have had one of the longest periods of growth in house prices so they will return to around the long term average growth which means they stay stagnant for a while or decrease. The other thing people forget is that with a home loan, inflation in the moderate range is your friend, as your earnings usually outpace the value of your repayments, even if house prices don’t grow.

noodle noodle 9:33 pm 13 Aug 08

Jerry Howard’s comments seem reasonable to me. While banks may not foreclose on people with negative equity in their homes, I’m sure most people wouldn’t want a situation where their mortage was greater than the price of a house they’d bought.

I also don’t get the comments that builders want to keep land prices high so they reap more profits. Surely if land prices are high then that’s a price the builders have to pick up, squeezing their margins and reducing their profits?

MelonHead MelonHead 7:57 pm 13 Aug 08

My favourite quote from a builder was in response to my mate asking if the manhole/roof access in the laundry could be rectangular, (one dimension is obviously constrained by roof trusses, but it need not be square, was, “Nah! We never do that……”

Which leads me to concur with someone’s earlier statement about extensions, hating architects (how dare they specify anything except brick veneer), and getting anything out of the ordinary.

From what I understand, when land is wholesaled, a builder, or a consortium of builders, buy the block, develop it and populate the ordinary blocks with project homes, then flog the good bits for even more profit.

And don’t we like the narrow shoddy thoroughfares in some of our more recent suburbs?

Tempestas Tempestas 7:43 pm 13 Aug 08

Deano said :

One side effect of this is that it is almost impossible to get a builder to build a custom spec house for you, assuming you can get your hands on some land. And forget about getting an extension.

And here I was watching Grand Designs and thinking about huge basements with Decagons and high tech light tunnels…..

Deano Deano 5:33 pm 13 Aug 08

One of the factors in play is that building houses, whilst more expensive, is not as profitable as it once was. Builders are countering this by buying land, building spec houses and flogging the completed product off for more than the cost of the land and construction. In some ways, this is what the market wants – nobody wants to mess around with subies as an owner builder anymore.

One side effect of this is that it is almost impossible to get a builder to build a custom spec house for you, assuming you can get your hands on some land. And forget about getting an extension.

Tempestas Tempestas 4:36 pm 13 Aug 08

Land prices are one input, if land was to get cheaper, then more people could afford to build then there would be more demand for the same supply of builders – better outcome for them.

However if builders are also developers (aka speculators) then the increase in land value provides them a return over and above the costs of their supplied services.

In short you can make a good living being a builder, you can retire being a building developer. The MBA cares mostly about the last lot.

Ask yourself this simple question -why do builders (not all but a fair amount) hate Architects and quantity surveyors so much? – It has a lot to do with them confusing provision of a service for a profit with wholesale profit.

No bank will foreclose on negative equity – why would they and get a loss.

I’d be happy for the market to decrease, after all its what markets do, of course those who are over-geared will be in trouble, but again that is what markets do. If you overpaid more fool you. The more homeowners there are the greater the liklihood of capital going into something useful, not just negative geared tax effectiveness.

peterh peterh 4:24 pm 13 Aug 08

Holden Caulfield said :

And when the Mrs and I spent $210K, including land (680m2 block), building a three bedroom home in Harcourt Hill 8 years ago people thought we were mad spending too much money. What is mad is the rate at which land prices have subsequently escalated.

A bit of a sweeping statement, perhaps, but the cost of building a new home in Canberra does not appear to have increased in the last 8 years at the same rate that new land prices have.

I agree with verbalkint’s theory in that people claim they want cheaper housing for all, so long as their own house pricing isn’t affected. Well you can’t have both I’m afraid. I feel for first home buyers now, it’s pretty bloody daunting. 🙁

I think I will stay in my ex-govvie house for a while longer, then. $145k purchase price so many years ago….

Holden Caulfield Holden Caulfield 4:10 pm 13 Aug 08

And when the Mrs and I spent $210K, including land (680m2 block), building a three bedroom home in Harcourt Hill 8 years ago people thought we were mad spending too much money. What is mad is the rate at which land prices have subsequently escalated.

A bit of a sweeping statement, perhaps, but the cost of building a new home in Canberra does not appear to have increased in the last 8 years at the same rate that new land prices have.

I agree with verbalkint’s theory in that people claim they want cheaper housing for all, so long as their own house pricing isn’t affected. Well you can’t have both I’m afraid. I feel for first home buyers now, it’s pretty bloody daunting. 🙁

caf caf 4:09 pm 13 Aug 08

Because if not, a LOT of people with land will be seriously peeved if they find themselves getting loan foreclosures because their home value has slipped below their loan value.

C’mon Al, that’s just FUD. Banks here don’t foreclose because you’ve hit negative equity (to do so would ensure that they lose out) – they foreclose when you stop making repayments. And they know that people will in the main go without just about everything else before they stop making the payments on their mortgages.

jakez jakez 3:33 pm 13 Aug 08

verbalkint said :

As someone who doesnt own a home, I would love them to get cheaper, but we non-home owners are in the vast mainority on this one, I am afraid.

That’s absolutely correct. I’m often surprised at how much currency our side of the story gets.

jakez jakez 3:28 pm 13 Aug 08

But in all seriousness though, I’m proud of the way Governments fight lobby groups. It really shows those public choice theorists the error of their ways…

verbalkint verbalkint 3:28 pm 13 Aug 08

It should also be pointed out that, while lots of people want houses to be more affordable, there are only a tiny number of people who want housing to get less expensive.

Most voters here in our fair ACT own homes and those who dont own homes wish to purchase one that gets more expensive in the future.

As someone who doesnt own a home, I would love them to get cheaper, but we non-home owners are in the vast mainority on this one, I am afraid.

Gungahlin Al Gungahlin Al 3:27 pm 13 Aug 08

Well I’ve got plenty of time for Jerry Howard from the MBA, and worked with him on Minister Barr’s Territory Plan Reference Panel.

To be fair I think the point he was making was that there needs to be a very careful balancing act with the land releases so we don’t get a glut of available land. Because if not, a LOT of people with land will be seriously peeved if they find themselves getting loan foreclosures because their home value has slipped below their loan value. Not just builders.

BUT he’s thinking ahead some way. We have such a serious undersupply (government/LDA engineered for price/stamp duty manipulation purposes some would argue), that it will be at least a couple of years before we get anywhere near that point.

While I don’t know I agree that building costs have only increased in line with CPI (Zimbabwe CPI maybe), think about the claim above that it is builders’ interests to keep land prices high. That couldn’t be more wrong – the more people have to spend on land, then less is available for the building. What builder is going to want that?

jakez jakez 3:27 pm 13 Aug 08

johnboy said :

Ralph said :

Bunch of grubs.

Another benefit of moving to small government is it starves all these parasites of oxygen.

Or leaves you with a Government ill-equipped to combat large and powerful lobbying groups….

Umm lobby groups fight for Government sway. That’s the opposite of small Government.

Sugar Lobby: Well Prime Minister we came here to make sure you keep your tariffs high but because Government is small and there are no tariffs, we magically win. MUAHAHAHAHAHA THE WORLD IS OURS!

johnboy johnboy 3:18 pm 13 Aug 08

Ralph said :

Bunch of grubs.

Another benefit of moving to small government is it starves all these parasites of oxygen.

Or leaves you with a Government ill-equipped to combat large and powerful lobbying groups….

jakez jakez 3:13 pm 13 Aug 08

johnboy said :

Well you know, builders have significant real estate holdings as they await sale, nice to get a capital gain.

It’s really a case of the master builders association doing their job on behalf of their members and a sensible society then ignoring them.

A bit like when police call for more powers.

If only it worked out that way.

Ralph Ralph 3:03 pm 13 Aug 08

Bunch of grubs.

Another benefit of moving to small government is it starves all these parasites of oxygen.

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