Browse Forums Building A New House 1 Sep 28, 2008 12:00 pm There is frequent commentary on how to avoid overcapitalising when renovating but what about when building a new home from scratch? Does anyone have a rule of thumb for a maximum ratio of house to land value?
One architect I spoke to said the ratio used to be 2:1 but now it's 1.5:1. To me this still seems too high. Previously land values would appreciate at a greater rate than construction costs, hence pushing the ratio down but with raw materials prices surging over the past few years and a shortage of tradespeople, it feels like build costs are surging also! I am planning on living in the home for at least 6-8 years so I can afford to overspend a little. I'd love to know some examples of what others have spent and whether it has proven to be a good decision or not. Re: House cost to land value ratio - avoid overcapitalising 2Sep 28, 2008 12:10 pm I think it really depends on the area you live. Towards the city I would think the ratio would actually be more in favour of the land cost.
I live in the outer eastern suburbs of Melbourne and around my area the ratio is very close to 1:1. Most people in my estate would fall into two categories: single story: land cost 230k + house cost 230k = market value of 460k double story: land cost 280k + house cost 330k = market value of 600-650k. Generally I've noticed people who are willing to spend more on the land will build a bigger more expensive house to go with it. People buying land at an entry level price will build a single story 30 sq house typically. As far as older areas and renovating I don't think its a good idea to spend out of proportion to what the surrounding houses are worth. If you are in a street with 300k properites there is no point spending 250k renovating a house as the finished product won't be worth the overall amount you paid. Of course thats just what I've found in my own area. Re: House cost to land value ratio - avoid overcapitalising 3Sep 28, 2008 12:21 pm Thanks for the feedback. Let's not forget the risk of UNDERcapitalising either which is hardly ever raised in conversation. If you build a 300k house on 500k land, any future buyers may view the house as a nuisance and a waste of such a good block.
I guess it depends on whether the house can be easily upgraded later to a 500k standard house if required. If house cost is kept low due to inexpensive fixtures and fittings, then probably a smart move. But if the structure and design is inadequate then a dangerous move to underspend IMO. Re: House cost to land value ratio - avoid overcapitalising 4Sep 28, 2008 1:03 pm I'd suggest building the best house you can comfortably afford with the features you need. Particularly if you plan on staying long term.
I have a friend who has extended a fairly new home. Definitely over capitalised, but it will suit his needs (runs business from home). It is a long term prospect so eventually will get his money back if and when he decides to sell. For sure building costs have sky rocketed Re: House cost to land value ratio - avoid overcapitalising 5Sep 28, 2008 2:19 pm Quote: If you build a 300k house on 500k land, any future buyers may view the house as a nuisance and a waste of such a good block I disagree. Many people are lazy, and are happy to pay a premium for a new house without the hassle of both time and effort consumed with building, particularly in established parts of Sydney. We will have spent similar amounts to those quoted (more for the land, less for the house even ) From our research, how you get there is not what matters. It's all about the finished product. Re: House cost to land value ratio - avoid overcapitalising 6Sep 28, 2008 2:38 pm HappyHome, perhaps you misunderstood my comment. I agree with you in that an already built home will attract a premium because of the hassle avoided (has been 10 mths since I bought my land and not a brick has been laid, grrrrr!).
My point was that you'll get more of a premium for the RIGHT house. Particularly if you are selling within 2-3 years, spending 400/400 may be better than spending 500/300 as someone who can afford the 500k block will generally expect to live in a 500k house, or at least have the potential of upgrading to a 500k house in the near future. If you are not selling for 10+ years, I believe the equation changes the other way. Land appreciates in value while a house depreciates so when 2018 comes around, your land will be worth plenty while your house would be due for some renovations. In this case, buyers won't be as fussed about what you spent on the house as it will be a small % of the overall property value anyway. Re: House cost to land value ratio - avoid overcapitalising 7Sep 28, 2008 2:58 pm In the very outer suburbs of Melbourne there are 400-600m2 blocks selling for over $150,000. Land on these estates is way overpriced and it is usually cheaper to buy an established (even brand new) house than to build yourself.
Our house to land ratio was 2:1, but that is building on a decent sized block in a small town. In our street you could spend $120,000 on land, build a $180,000 house, sell and walk away with $60,000-$80,000 profit ... as opposed to some of the nearby large suburban estates where you would be lucky to break even. Re: House cost to land value ratio - avoid overcapitalising 8Sep 28, 2008 3:28 pm My house to land ratio is 2:1 (approx) as well. We are in an outer area (officially a country town) but will be a suburb soon enough.
We believe our land will prove to be an extremely good long term investment. We had an overall budget, and could have bought land for a similar amount or cheaper in other areas.... but then the house we are choosing to build would have been completely overcapitalising for those areas. We chose a block in an estate that covers a lot of different building styles and sizes (first homes (and land) worth $260,000 on 400m2 to up and over the $1m on acreage, and everything in between) but our house will be of a finished standard that is desirable in the estate. The closer you get to the city though..... the more likely the land will eat up a bigger portion of the budget. Jo I leave you to fend for yourself, figure things out yourself. Terrence Malick Re: House cost to land value ratio - avoid overcapitalising 9Sep 28, 2008 3:36 pm Sorry MJ,
My comments are in relation to suburbs where there is no land for development other than kdr's, as Joles said those established suburbs closer to the city where you pay a premium for land to begin with, rather than land developments on the fringes. Re: House cost to land value ratio - avoid overcapitalising 10Sep 28, 2008 5:01 pm MJ1975 \My point was that you'll get more of a premium for the RIGHT house. Doesn't that also depend on the buyer? I've seen some fairly average houses go for way more than estimated because 2 competing buyers fell in love with the place. Our house:land ratio is about 0.75:1 - but Sydney land is hideously expensive. After 4 years - we're in! Re: House cost to land value ratio - avoid overcapitalising 11Sep 28, 2008 5:17 pm By "right" house, I mean a house of appropriate quality given the quality of the land. A 50k tin shack could be the right house in certain circumstances.
Quote: I've seen some fairly average houses go for way more than estimated because 2 competing buyers fell in love with the place. By definition, if 2 competing buyers fell in love with it and pushed the price up, the house would generally not be average, no matter what you or I thought. And if it was average, then the vendor got lucky. So 0.75:1 in your case? My guess would be this ratio would be common in large parts of Sydney where there is a high floor price for land of any quality within 30km of the CBD. Other capital cities seem to have more of a "low end" range for land or knock-down possibilities. Re: House cost to land value ratio - avoid overcapitalising 12Sep 28, 2008 9:15 pm Ours will be 0.83:1 (I just worked it out on my calculator and can see Jo's nerd radar pointing at me now )
By the time we do driveway, window furnishings, light fittings, alfresco, landscaping, it will be 1:1 if not over. Re: House cost to land value ratio - avoid overcapitalising 13Sep 28, 2008 11:07 pm Ours will be roughly 0.5:1. Yes, Sydney is horrendously expensive, particularly in the area I live in. We pretty much plan on staying there forever though, so it's worth it.
Judie Re: House cost to land value ratio - avoid overcapitalising 14Sep 30, 2008 11:18 am With regards to the house to land ratio, does the house price include all the extras like landscaping, flooring, curtains. Or just the raw price that you pay the builders? Re: House cost to land value ratio - avoid overcapitalising 15Sep 30, 2008 11:57 am Ours will be 2:1 - this is for everything except the rear landscaping and curtains (may be using old sheets initially). We are building in the ACT. 'We make a living by what we get, but we make a life by what we give.' - Winston Churchill Re: House cost to land value ratio - avoid overcapitalising 16Jul 11, 2022 12:11 pm Ours will be 1:2.3. beach suburb . land is $600, build will be $800-$850. Purchased a lot with a wider frontage to achieve a three car garage. 5 bedroom + office. We are in a comfortable position so feel it's nice to add an extra bedroom and more car space. Can't say how long we'll live there but we don't plan on moving any time soon. Have a young family, so intend to say put for a while. I think these extra items *(incl space/ sq m's ) will help our home stand out amongst the crowd, when we do come to sell. Finding a builder who can achieve a quality looking home helps too. Re: House cost to land value ratio - avoid overcapitalising 17Jul 11, 2022 5:04 pm overcapitalising usually means don't build things like pool, fireplace etc, unless you actually need it, or it's expected that the kind of house you're building should have one. or don't put a fancy kitchen or bathroom in, if the rest of the house looks like trash. if you're building a house for yourself though, an easy way to not overcapitalise is to not think about the items that you like to have in your house as capital investment. think of them as just things you want to treat yourself with. as long as you can afford it, and don't expect to get any kind of return from it when you sell the house - it's not overcapitalisation It pains me to do this, but I feel that I need to get the word out and ensure others don't have the same outcome as me. Avoid dealing… 0 1331 The last home I lived in didn't have a pool and when i went to sell it the agents were not happy, even telling me to put one in to sell the place. The agents weren't happy… 2 4674 |