Why are new builds so much more expensive than second hand properties?
Updated: Apr 5
This one is a source of frustration for a lot of first time buyers. You've been saving for years, approved for help to buy and then the prices are released for the new development you've been waiting on and they are out of your budget, even with the €30k from the help to buy.
But why are new builds so much more expensive? If you ask developers, they'll say it is the cost of materials and labour. And that might be part of it, but does it really account for the large difference?
While there might be a variety of reasons for the difference in pricing, we've outlined some of the most common reasons why new builds carry such a hefty price tag!
New Builds Are Subject to Vat
New Builds have vat, second hand properties do not. The vat rate for housing is just 13.5%, which is lower than the standard rate of vat of 23%. However when you are talking about several hundred thousand euro, that 13.5% becomes a lot of money!
If a developer sets a price a new property at €400,000, it doesn't sell to the public for that price. It would actually sell for €454,000 (price+vat)
The when the purchase is complete, the extra €54k goes straight to Revenue!
New Builds have a Higher BER
Most new builds today have an A2 or A3 BER. This means they are far more energy efficient. Most will have heat pumps which cost about the same as a large fridge to run and you also won't have gas or oil bills on top.
On top of this, they are built up to the current building regulations and standards which means the houses should be more airtight and lose less heat than older properties.
All this means the energy bills of a new build should be significantly cheaper than a second hand property meaning people will be willing to pay more and so increasing demand.
You are paying for the Developer's Costs
New builds will have costs associated with them which second hand properties do not, or at least not as directly!
Land costs: A developer will need to purchase a large piece of land to build a new estate. This land, especially around cities and big towns, comes with a premium as the land which needs to be purchased is not just the plot which the houses will sit, but also the green spaces, roads and any other facilities or amenities in the estate.
Marketing and Selling Costs: Despite the high demand, developers will still spend quite a bit of marketing and selling costs. This includes staff, advertising, estate agent fees, solicitor fees for processing the sale and in the case of some developers, the cost of community days after the development has launched. Of course, all of these costs will get passed onto the seller and can add as much as €15k-€20k onto each house.
Building Supplies: There has been a recent drop in the cost of building supplies we seen during the pandemic, however, the cost is still higher than 5 years ago. Because of this, developers have purchased their own quarries and lumber yards to cut out the middle man and cut down on the cost of raw and processed building materials.
For smaller developers in particular who do not have large purchasing power, the cost of materials has resulted in an signifiant increase in market prices of new builds.
Connection to Services: When a new development is constructed, the developer needs to have the properties connected to water and wastewater networks (Irish Water), electricity network (ESB Networks) and various networks for services like phone, internet and TV.
The developer will need to pay for this work to be done. In turn, this is - you guessed it - added to the cost of each property for the buyer to pay for. This is a cost which second hand properties do not come with as they are already connected to these networks.
Help to Buy Grant Means Buyers Have More Money
Every single first time buyer is entitled to the Help-to-Buy grand of up to €30k (depending on tax paid over the last 4 years). This means that on average people who are buying new builds, have access to more funds than those buying a second hand property. Basic economics would dictate that this drives up demand on New Builds which enables developers to increase the prices.
In fact, there is plenty of anecdotal examples of developers increasing prices in line with announcements of new or increased grants for first time buyers.
New things are generally more expensive!
With the exception of collectables and rare items, new things are generally more expensive. Although most second hand properties have lots of life left in them, New Build properties are a blank canvas, brand new and waiting on you to put your own mark on it. They should have no conditional issues and you are less likely to have large maintenance costs in the next few years.
This "New" appeal can mean that many people are willing to pay a premium, even if they do not require the help-to-buy to get over the line! Again, this adds to demand an helps to drive up the prices.
Developer will add a Markup to Ensure Profit!
During a housing and cost of living crisis like we are currently in, this one rubs a lot of people up the wrong way! But when you boil it down, developers are businesses and businesses exist to make a profit. Depending on where the new development is, the standard of build and a few other factors, developers aim to make anywhere from €30k to €70k profit per unit AFTER all costs. Even at the lower end, if take a development of 100 houses, once they are all sold the developer would have a profit of €3m... On just one development!
During a housing crisis, there is a big argument to say that the state should become the biggest developer of new properties and not leave it to the free market. This happened to an extent during previous housing crisis' and although was not a perfect process, it did results in hundreds of thousands of houses built throughout Ireland which are sill standing strong today!
When you lean more towards the left (state control) or right (free market) economically, the argument for state intervention holds a lot of weight. But right now, the cost of housing will continue to be left to market forces!