Buy Vs Build

Reporter: Mark Gibson

When you're a child deciding whether to build your dream home from scratch like Asha, or buy an established one you've got your eye on like Rhiannon, is just another game.

These two won't have to choose for a while yet, but in an ever changing market, it's a grown up decision that thousands have to make right now.

Sick of renting, Emma and Steve went through the real estate ringer. They just couldn't find what they were looking for, but did they make the right decision?

Financial analyst Harry Senlitonga from Canstar Cannex, helped us crunch the numbers. He found in most cases, buying beats building, in the short term.

"If you buy an existing house within a year you are saving over $8,000 in comparison to building a new house."

So, here's how we made the comparison, the rules if you like.

We based it on the average Perth property price of $418,000.

Buyers had a 10% deposit, just under $42,000. That's a mortgage of $376,000.

Nine months construction time for a new home.

$1,600 a month rent while the new house was being built and the first home owner's grant.

$21,000 for a new home. $14,000 for an established one.

So, we looked at various scenarios so lets see how the figures stack up.

After 12 months, with zero capital growth…

As most new home builders are paying rent while they wait, established home owners are ahead $8,000.

Steve and Emma are lucky. They're living with Steve's parents and not paying rent while their home is being built. That can more than make up the difference, but what about the longer term and what happens with different rates of capital growth?

"It is important for first home buyers to consider the annual growth of the property that they will buy" says Harry.

If you allow for $3 growth the new home is worth $403,000 when you've subtracted all your expenses.

It's $411,000 for the established home. Still, buying beats building by around $8,000.

But what if the two properties don't grow at the same rate, more like the real world, where existing suburbs do much better than new suburbs?

Well, let's look at those numbers…

If the new home increases in value by 3% and the established home goes up 6% suddenly with the older home you're almost $21,000 better off after just one year.

Rob Druitt from the Real Institute of W.A says don't forget the golden rule; Location, location, location.

"The middle and inner ring in Perth, that is up to about 12 kilometres from the city centre or very close to regional centres has tended to grow at a greater rate than the outer lying areas in Perth" says Robert.

Rob also says if you're building, beware the beginners' trap.

"It's very tempting with a brand new home. Look at a full package and then start to add bits and pieces in and next thing you know building costs can be 10% or 20% more which you haven't budgeted for…so you've got to resist that temptation and keep very much to the budget."

The one area where buying an existing house could hit you in the hip pocket is maintenance costs. Things are more likely to break down in an older home. For that reason our financial analyst says in the longer term the difference between buying and building becomes much less important.

"By assuming the property growth remains the same between these two types of properties over 5 years, we've seen the difference between these two properties is insignificant."

So, if you're after short term gain, a house for 2 or 3 years, the best tip is an established home.

For a longer term proposition, 5 to 10 years, building in a new suburb could be the way to go.

Entering the real estate world isn't exactly child's play, but with interest rates low, the first home owner's grant and stamp duty relief, now is as good as it's been for years. So, to buy and move straight in or to build?

Here's one last tip from a grown up…

"Whether it be established or whether it's a brand new home make sure that you budget carefully and stick to it and that you can keep within that budget."