|
|
|
|
Appendix 6Land Costs and Building CostsA6.1 This Appendix draws together information, contained in a number of submissions to the Joint Committee, which provides useful insights into land and building costs. Also included is a table published recently by the Irish House Builders Association which was not received as a submission. A6.2 The information contained in the submissions etc. does not purport to be typical of house or land costs in general. It gives examples of actual transactions and illustrations of plausible hypothetical situations. Publication of the information by the Joint Committee does not indicate agreement with it. It is reproduced in Annexes A to D of this Appendix. Annex A was provided by An Foras Forbartha, Annex B by the Society of Chartered Surveyors (formerly RICS), Annex C by the Construction Industry Federation and Annex D (not a submission) was published recently by the Irish House Builders Association. Section A6.1 Elements of the Total Cost of HousingA6.3 Although there are differences in the information, they also illustrate some of the main features of a breakdown of total housing costs. The two examples of full breakdown in Annex A and Annex D are summarised for comparison in Table A6.1: TABLE A6.1 Examples of Cost Breakdown for Private Estate House (% of total costs)
Site Costs•The cost of an undeveloped site is 13 per cent in one example and 20 per cent in the other (although they differ in relation to planning permission). It may be noted that in the examples given in Annex B, the undeveloped site costs quoted range from 10 to 14 per cent of the final house price and also in Table A6.3 below undeveloped site costs are generally about this order of magnitude also. Labour Costs•It appears that labour and materials constitute less than 60 per cent of the final house price (56 per cent in one example, 49 per cent in the other). This illustrates the importance of other elements of building costs in the total cost of housing and may be the main reason for the difference between private single and private estate housing in terms of final accommodation standards obtained for any given amount of money. Returns to the State•The total potential returns to the State from new housing activity could amount to some 35 per cent of the price in estate housing and 25 per cent in single houses. However, this includes general taxes which apply to all areas of economic activity. Table A6.2 breaks down the State revenues into three main groups. TABLE A6.2 State Revenues* from New Housing (for a house costing £40,000)
Site Development Costs•Finally, Annex C is an example of the costs involved in site development to a property developer. The example is for a one acre parcel for 10 house sites and would result in a final developed site cost of £9,000 per house. Site development costs (labour and materials) amount to about £2,800 per site or just under one-third of the final developed site price. The raw land in this example is only £1,600 per undeveloped site and it illustrates that windfall gain may accrue to the original landowner and/or the property developer depending on the nature of the transaction. Section A6.2 Trends in the Land Cost Element of Building CostsA6.4 On the basis of data provided for the Kenny Report, it appears that the average price of an undeveloped house site on publicly serviced land in Dublin was about £800 in 1971. The average price of a new house was £6,000 and the undeveloped site cost represented 13 per cent of the final house price. A6.5 Table A6.3 shows the relationship between prices of undeveloped house sites and new house prices in the Dublin Area from 1976 to 1983. Also shown is the average house size. TABLE A6.3 Average House Size in Dublin and Price of Undeveloped Site as a Percentage of the Average House Price
A6.6 As a background to Table A6.3, it should be noted that after 1976, there was a significant shift in demand towards larger and relatively more expensive houses. Between 1976 and 1978, the average size of new houses in the greater Dublin area increased by 21 per cent from 95 m2 to 115 m2 It dropped back since then to 112 m2 in 1980 and by 1983 was almost back to the 1976 level. Only 24 per cent of new house in 1976 were four bedroom or larger whereas this had increased to almost 70 per cent in 1978. Again by 1980 four bedroom and larger had dropped back to less than half, 48 per cent, of new houses. A6.7 One of the most important features of Table A6.3 is that the price per undeveloped site declined slightly as a proportion of the average house price between 1976 and 1983 in the Dublin area as a whole. In the three main sectors of Dublin shown, the pattern varied considerably. The North suburbs were affected by the move to larger house in 1978 but since then the type of house being built has returned to a fairly normal mid-market size. In this sector site prices declined as a proportion of the total house price, over the full period. The South suburbs felt the main impetus of the move to larger new houses and, unlike the North suburbs, the emphasis on larger houses has continued through to 1980. Site prices in this sector tend to be highest relative to total costs. In the New Town areas, the behaviour is also interesting. This sector was not affected by the switch to larger houses between 1976 and 1978, and the type of house being constructed in those years was very much at the lower end of the market. Site prices, in consequence, appear to have been low also. In 1979 and 1980, however, the type of house being constructed in the New Town areas changed to a size similar to the North suburbs of Dublin and site prices increased to a level comparable with that for houses in the mid-market range generally. Although the house size dropped markedly from 1981 onwards, site prices remained high until 1983. A6.8 The information available suggests, therefore, that not withstanding the over all increase in land prices the site cost element in final house prices has not changed to any appreciable extent over the past decade or so. Section A6.3 Determinants of New House PricesA6.9 What causes new house prices to be at any given level? If a particular market is under discussion, this question can only be answered by examining that market; the reasons may differ between markets. Some conclusions relevant to the Irish market in the past ten to fifteen years are given in the text of the report. However, in any discussion of new house prices, there are a number of general points which have to be taken into account. These are outlined below. The Wider MarketA6.10 New buildings are part of a wider market which includes secondhand buildings available in the existing stock. The supply of new buildings is, therefore, in competition with the existing stock and indeed demand for new houses will arise only if the stock is not able to meet requirements. The Kenny Report notes that: “As population and income rises, the initial tendency is for the prices of existing buildings to be bid up. As this demand pressure mounts, the development of green field sites and the redevelopment of existing urban sites becomes more profitable.” The price of new buildings, therefore, is determined in a market which includes the existing stock and additions thereto. Figure A6.1, for example, shows the trend of new and secondhand house prices since 1970 and illustrates how closely they have moved together. A6.11 New house prices are determined by supply and demand in the housing market as a whole, not just by the costs (including normal profit) of building houses. If the all-in costs of house building to a given standard are lower than the general level of prices then in the short term builders will make larger profits. If price levels are lower (e.g. because of oversupply of secondhand or new houses) then builders will make a loss or cease building. If the housebuilding market is competitive, as it appears to be, then larger profits by builders are a result not a cause of high prices for new houses. FIGURE A6.1 House Price and Cost Trends
Source: SCC Report on the Construction Industry A6.12 The relationship between house prices and land prices has been a central issue in the debate on building land. The most common approach to new house price determination has been cost based; it tends to look at the level of house prices as being made up of the costs of the various inputs and, since land costs were the most rapidly escalating component, this led to the view that the increases in house prices resulted from increases in land costs. A6.13 This approach is based on a misconception as to how the level and trend of new house prices are determined. It is a view that becomes untenable if one considers the prices of secondhand houses which have no cost of provision. A6.14 If there is windfall gain or extra large profits to landowners and/or builders and developers, this is equivalent to saying that prices of houses (or other buildings) are not made up solely of input costs. Windfall gain and larger profits are both residuals and result from general market conditions unless it can be shown that landowners and/or builders have some monopoly type influence on supply. The Committee has no evidence that such is the case. Annex ACosts and Charges Arising in Housing and Building Land DevelopmentTwo examples attached outline the land and building costs associated with housing development from raw land to completed house. Costs arising from arranging mortgage finance are not included. Example 1 is the more straight-forward case where the prospective house owner purchases a site directly from a farmer and contracts all the building and development work to a builder. This type of situation would apply to about half of all new private housing, i.e. all private single houses. Example 2 is an example of the situation which applies to speculative housebuilding and would be representative of main urban centres. In this case, it is assumed that the builder purchases an undeveloped 10 acre parcel of land from a property company. A large number of variations are possible on either example. Notes are annexed at the back which explain some details of the examples and point to the type of variations which do occur. Each example is based on a house “purchaser” with access to £40,000 finance. This is to illustrate the workings of the market (for housing and for land). The general level of house prices is determined by the type of purchaser active in the market and the amount of finance to which the purchasers have access. The costs of housebuilding, and other charges arising, will determine what the purchaser gets for £40,000 (i.e. the type of house and its location). The examples show that for the same amount of money the private single house provides more in terms of accommodation and plot size than the speculatively built house. Apart from differences in transaction costs, fees and other charges, the housebuilder working on contract can provide for a lower profit margin than the speculative builder, since the latter must allow for risk. In a buoyant market the speculative builder may realise the full profit but in poor market conditions it may be wiped out altogether by extra interest payments. The difference in plot size illustrates that where building land values differ, these differences do not necessarily carry through to house prices. Unless there are restrictions on building densities it is more likely that plot sizes will adjust, to leave the site prices unchanged. Unlike all of the other costs, the market value of undeveloped land is not the result of any productive effort on the part of the property owner. Under existing legislation two types of tax liability will arise in respect of the land transaction shown in Example 2. The property company is subject to corporation tax on its profits (land is its stock in trade) and the original landowner will be liable for capital gains tax. In contrast the seller of a site for a private single house is unlikely to be subject to tax. Finally, it should be emphasised that though the property owner acquires a substantial gain from sale of the land he or she does not create the value of land. The market value is determined by demand and by the amount supplied by other owners. EXAMPLE 1: Private Single House Built by Contract
EXAMPLE 2: Private Estate House Spec. Builder, 10 acres, 80 house
Notes on Examples 1. The PAYE/PRSI charges shown here refer to a building firm which uses its own labour. We have used a percentage of 33. It could go as high as 40 per cent. However, many firms use labour only sub-contractors extensively and the tax liability would be lower. Note that in all cases, we compute tax liabilities not tax receipts and no allowance is made for avoidance or evasion. 2. This includes both corporation tax and tax on directors remuneration. The 50 per cent corporation tax rate has been applied overall for convenience. 3. VAT on building contract at 5 per cent. (This is now 10 per cent.). 4. The ESB charge varies depending on circumstances. The £500 shown in the case of a private single house is probably at a minimum level. In the case of estate houses, it also varies but the charge of £300 per house would probably be fairly typical. 5. The interest charge in the case of a private single house is incurred by the owner to finance the building and by the builder in the estate case. Tax liability is unknown but see Note 14. 6. Most private single houses do not use professional design services but would typically pay a local for sketch drawings and assistance with planning permission; the £200 is an order of magnitude allowance. In the case of estate housing we have used the professional scale of fees for design without supervision. 7. Typical planning permission fee. 8. The development levies vary from county to county. In the case of the private single house we are using a case where connection for water only is provided by the local authority and the house owner providing a septic tank. This would be typical. The £750 charge in the estate house is based on £6,000 per acre development levy charged by Dublin County Council. 9. Fee for certificate from the Department of the Environment. 10. Single site transaction valued at £5,000. Tax liability may arise but we assume that the exemptions, etc. applying to transactions under £15,000 result in nil liability. 11. Standard legal fee. VAT is paid by the purchaser at 23 per cent. 12. Stamp duty rates vary from nil to 6 per cent depending on the value of the transaction. In the private single house site it is 1 per cent of £5,000. In both land transactions in example 2, it is 6 per cent (of £400,000 and £300,000 respectively) and is shown in the examples on a per house basis. 13. Land Registry plan searches. These are minimum level and may be higher depending on the complexity of the deeds. 14. Tax liability on the unknowns. We have made allowance only for 20 per cent but it may be higher — up to 60 per cent. 15. The legal fees here are on the house transaction and are charged by the purchaser’s solicitor. 16. This is a purely provisional figure. 17. Some builders may engage consultants if planning appeals, etc. are involved. No provision made in the example. 18. This is the legal fee paid by the builder to his own solicitor, these fees are probably negotiated and this provision is order of magnitude. (VAT arising would be reclaimed by the builder). 19. This is a provision for advertising and use of estate agents to market the houses. Again it is an order of magnitude provision. 20. This is the tax liability of the property company on the sale of the parcel of land. In outline the tax is estimated as follows:
Corporation tax of £65,000 @ 50 per cent = £32,500. Tax paid per house basis of £400. 21. This is the tax liability of the farmer under the present capital gains tax legislation. It is based directly on the example provided by the Department of Finance (for a £300,000 transaction) to the Joint Committee. Annex BExamples of Housing and Land Development
VALUE OF RESIDENTIAL DEVELOPMENT LAND (for holdings in excess of 5 acres)
Annex CTYPICAL LAND TRANSACTION WITH DEVELOPMENT POTENTIAL IN DUBLIN AREA(One acre, 10 house sites)
Annex DHouse Cost Breakdown
* Without planning permission in Annex A, with permission in Annex D. * Contributions set off against road widening land which was ceded to Local Authority. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
