Should you build or buy a home?

author-avatar By
on December 29, 2021
Should you build or buy a home?

It’s the age-old housing debate, is it better to build or buy your own home?

New building approvals shot up in the first half of 2021, driven by government incentives such as HomeBuilder. But in recent months, building approvals have started to drop off. 

Now that HomeBuilder has run its course, if you're looking for a new home, should you build or buy?

Arguments can be made for both until the sun goes down (and longer), but we’ve tried to focus on a few key points to help you make your decision.

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender
Advertised rate Comparison rate* Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval

VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
ZERO APPLICATION FEESFEE FREE OFFSET

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
  • No upfront or ongoing fees
ZERO APPLICATION FEESFEE FREE OFFSET

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
  • No upfront or ongoing fees
FixedMore details
USE A MARKET LEADING APP TO HELP YOU PAY OFF YOUR LOAN SOONER

Fixed Home Loan 1 year (Principal and Interest) (LVR < 80%)

  • Make up to $20,000 additional repayments per fixed term
  • Redraw available – lets you access any extra loan repayments you’ve made
  • Choose to rate lock for 90 days (fee applies)
USE A MARKET LEADING APP TO HELP YOU PAY OFF YOUR LOAN SOONER

Fixed Home Loan 1 year (Principal and Interest) (LVR < 80%)

  • Make up to $20,000 additional repayments per fixed term
  • Redraw available – lets you access any extra loan repayments you’ve made
  • Choose to rate lock for 90 days (fee applies)
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Variable Owner Occupied, Principal and Interest (Refinance Only)(LVR <75%)

  • No application or ongoing fees.
  • 100% free offset sub account.
  • Fast online application, approval in minutes not weeks.
  • Mobile app, Visa debit card, Apple and Google Pay
  • Refinance loans and variable rates only.
REFINANCE IN MINUTES, NOT WEEKS

Variable Owner Occupied, Principal and Interest (Refinance Only)(LVR <75%)

  • No application or ongoing fees.
  • 100% free offset sub account.
  • Fast online application, approval in minutes not weeks.
  • Mobile app, Visa debit card, Apple and Google Pay
  • Refinance loans and variable rates only.

Rates correct as of January 24, 2022. View disclaimer.


Is it cheaper to build or buy a home?

There are so many differing opinions on whether building a home or buying one is the way to go but for the majority of people, the biggest deciding factor in any decision comes down to money.

A house will typically be the most expensive thing a person owns in their life, so the cheaper option will often be the more popular option.

Let’s first look at the cost of building a home.

It’s hard to overstate just how difficult it is to pinpoint how much it costs to build a house.

The Urban Development Institute of Australia’s (UDIA) annual State of the Land report for 2021 revealed the median costs and lot sizes across the country.

Using their data, we can see the median cost of buying a lot of land across the capitals in the table below.

Unsurprisingly, Sydney had the most expensive median lot price, followed closely by the Australian Capital Territory, while Adelaide had the cheapest median lot price.

Data for Hobart and Darwin was not recorded.

While building a home doesn’t require you to pay stamp duty on the building itself, it is required on a lot of land which, as you can see in the table below, can be extremely costly.

First home buyers are eligible for exemptions on stamp duty, with differing legislation across the states.

City

Median lot price

Stamp duty

Sydney

$477,750

$17,003

Melbourne

$319,000

$13,288

South East Queensland

$265,000

$8,427

Adelaide

$183,460

$7,902

Perth

$215,000

$6,872

Canberra

$416,000

$9,115

National average

$312,700

$10,434

Source: UDIA, Stamp Duty Calculator Australia

While it’s relatively easy to find the cost of a lot of land, the exact cost of building a home can vary massively.

Data courtesy of Rider Levett Bucknall detailed Australia’s construction building costs from 2021 for custom-built, single and double-storey dwellings.

As seen in the table below, Sydney had the highest build cost at $432,180, while Adelaide had the cheapest at $314,736.

City

Lower range cost per sqm

Average floor area m2

Low range total cost

Sydney

$1,960

220.5

$432,180

Melbourne

$1,860

246.4

$423,808

Brisbane

$1,800

231

$415,800

Adelaide

$1,580

199.2

$314,736

Perth

$1,400

236.5

$331,100

Canberra

$1,700

242.5

$412,250

National average

$1,716

229.4

$393,650

Source: Rider Levett Bucknall’s Construction Cost Indicator 2021

It’s important to understand that these figures are an extremely rough estimate and should be treated as such. They don’t take into account whether the land needs to be levelled, use of high-quality materials or accessories, delayed timeframes, and a plethora of other factors that come with building a home.

So using our very rough estimates, we can garner an idea of how much it would cost to build a house in Australia by totalling the median lot cost, stamp duty, and low range cost of the build.

As seen in the table below, Sydney marginally comes in as the most expensive city to build a home, followed closely by Canberra. On the other hand, Adelaide is the cheapest capital city to build.

City

Total build cost

Sydney

$926,933

Melbourne

$756,096

Brisbane

$689,227

Adelaide

$506,098

Perth

$552,972

Canberra

$837,365

National average

$711,448

To gain an insight into which option is roughly cheaper, we can compare these total costs of building estimates to median housing values.

CoreLogic figures released in December revealed the median house prices for each capital city as well as the national average.

By comparing them in the table below with the total build cost estimates, we can see the recent housing boom has pushed housing values higher than new build costs. 

The national average suggests it could currently be around $160,000 cheaper to build than it is to buy.

Again, these are extremely rough estimates. The cost should not be the only factor you consider when deciding on whether you build or buy.

These figures are also based off of the capital cities as figures are not easy to find for regional areas. As a result, it may be cheaper to build rather than buy or vice versa in regional areas across the country.

City

Total build cost

Median housing value

Sydney

$926,933

$1,360,543

Melbourne

$756,096

$986,992

Brisbane

$689,227 $757,194

Adelaide

$506,098 $608,624

Perth

$552,972 $552,158

Canberra

$837,365 $999,755

National average

$711,448 $877,544

Source: CoreLogic


Pros of building a home

Without considering the costs, there are a number of advantages that come with building a home compared with buying one.

1. Personalisation

Building a home from scratch will typically mean you’re involved in each step: finding and buying a lot of land, choosing your builder, deciding how many storeys there are, bedrooms, bathrooms…the personalisation options are endless. The construction and building industry are partly so massive because of the variety of homes and features available. If you want to build a ten pin bowling alley in your house and have the funds to do so, you can! Finding a house that meets your every need can be far more difficult when simply buying an existing home.

Additionally, choosing higher-quality materials means there’s less chance of your home requiring maintenance down the line, as well as improving the value of your home. In contrast, an established home may have existing maintenance issues prior to your arrival.

2. First Home Owners Grant

The First Home Owners Grant (FHOG) eligibility and payments differ between states and territories. However, the one constant is that it’s available for those building a home. Homebuilders can expect to receive at least $7,000 from the state or territory government to assist them in paying for the building which can hugely help when saving for a deposit. The FHOG is also available to those buying a brand new home.

3. Stamp Duty

As evidenced above, stamp duty costs can rack up into the tens of thousands of dollars. If you’re a first home buyer then you may be eligible for a concession but many people aren’t in this boat. Building a home means you only have to pay stamp duty on the lot of land and not the property itself. To show you how much that can make a difference, let’s take Sydney as a case study.

Building on the median $477,750 land lot in Sydney will mean you have to pay around $17,003 in stamp duty on the land. In comparison, buying an established property in Sydney at the median dwelling price of $1,360,543 will cost you around $60,028 in stamp duty - more than double what you would pay if you built.

You might like to check out our stamp duty calculator 

4. Energy efficiency

Part of the personalisation aspect of building a home means you can choose the materials, lighting, and cooling used throughout the home. Choosing energy efficient options when building your home can save you thousands on electricity and gas costs. High-quality materials like double glazed windows and doors will block out noise and reduce heat penetration by up to 40% compared to standard glass. While installing solar may be expensive upfront, it could help you save on energy bills in the long run.


Cons of building a home

As many positives there are for building a home over buying one, there are a number of negatives too.

1. Time

Unless you’ve signed up to a ‘Block-esque’ type show, where they build your home in under a week, chances are your build will take time and lots of it. While buying a home means you can move in upon completion of finance and paperwork, building a home could take anywhere from six months to a year, or even longer. You need to factor in the cost of renting elsewhere while you complete your build. This can quickly add up and might also mean you have to live somewhere you don't like. 

2. Construction loans

construction loan is a specific type of home loan designed to assist the funding of a new home’s construction. Although construction loans are great for when you’re building home, when compared with normal home loans, they have a number of downsides. Most notably, they typically have higher interest rates, which could cost you more over the life of your loan. Furthermore, they can have higher fees, require a larger deposit and they don’t tend to function as a normal home loan does, drawing out the process through financial red tape.

Lender
Advertised rate Comparison rate* Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval

VariableMore details
GET A DISCOUNTED GREEN RATE

Green Construction Home Loan (Interest Only)

  • Interest Only during construction
  • No monthly, annual or ongoing fees
  • Get Australia’s lowest rate construction loan when you go green
GET A DISCOUNTED GREEN RATE

Green Construction Home Loan (Interest Only)

  • Interest Only during construction
  • No monthly, annual or ongoing fees
  • Get Australia’s lowest rate construction loan when you go green
VariableMore details
FREE REDRAW FACILITY

Basic Home Loan (Principal and Interest) (LVR 70%-80%)

FREE REDRAW FACILITY
VariableMore details
AN EASY ONLINE APPLICATION
  • No application fee
  • Unlimited additional repayments
  • Unlimited free redraws
AN EASY ONLINE APPLICATION
VariableMore details

Rocket Repay Home Loan (Interest Only)

VariableMore details

Standard Variable Home Loan (Interest Only)

VariableMore details

Standard Variable Home Loan (Interest Only)

VariableMore details

Standard Variable Rate Home Loan (Principal & Interest)

VariableMore details
FAST TURNAROUND TIMES AND FLEXIBLE LOAN OPTIONS

Basic Investment Loan (Principal and Interest) (LVR < 60%)

FAST TURNAROUND TIMES AND FLEXIBLE LOAN OPTIONS

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of January 24, 2022. View disclaimer.

3. Factors out of your control

The elements are fickle creatures and something humans have no control over (yet). If it rains for three weeks solid at your build site, then construction will be halted, lengthening the time it takes to build your home and costing you money. Delays could also come as a result of poor workmanship, equipment failures, labour shortages and council approvals.

4. Outside of the CBD

This article has mainly focused on the building of a house on a vacant lot of land. Chances are you won’t be able to embark on such an endeavour in the heart of a CBD or on its outskirts. Cities are typically apartment-orientated, which buyers can easily move into. Building a property may require you to look further out into suburbia to build your dream home.


Pros of buying a home

Buying a home over building a home has a number of advantages, which can include:

1. Convenience

Finding a home to buy can be as easy as going online and scrolling through properties as if you were looking for an interesting YouTube video to watch. In today’s age, you can buy a property without ever seeing it in person and complete the whole process online. Some lenders now boast they can process loan applications in a matter of hours, which means once you sign off, you could be in a new home only a week after finding it. Of course, this is hypothetical and things are rarely that easy, but compared to building a home, buying one is often a vastly more streamlined process.

2. Location

As Australia’s population swells, so too does the amount of housing built. For those who wish to build, spots to do so are fast drying up in cities and even regional areas. Buying an established home means you can choose your desired location with ease, without being restricted by the size or type of property.

3. Lower financing costs

Financing can be much simpler when buying a home compared to building a home. While a 20% deposit is typically favoured, many lenders will allow you to borrow up to 95% of the property’s value (provided you pay Lenders Mortgage Insurance). As well as often having lower interest rates than construction loans, normal home loans also have the advantage of a greater variety of loans (fixed or variable) as well as a larger range of lenders for you to choose from.

4. You know what you’re getting

It’s true building a home means you get to personalise much of the property, but things rarely turn out the way they’re supposed too. There are often hitches, miscommunications and mistakes which mean your gold plated bath turns into a copper toilet. When buying a home you know exactly what you’re getting, especially if you have an inspector look at the place prior to purchase (which is a must).


Cons of buying a home

As good as it can be buying a home over building one, there are downsides which include:

1. Wear and tear

Buying an established property means someone else will have lived in it. That will mean some degree of wear and tear which you’ll bear the brunt of. Wear and tear will only be more prevalent and increase over time with older properties like old Queenslanders, which will see you potentially have to foot a hefty repair bill. Older houses may also have higher electricity costs due to poor insulation and fewer energy efficient options.

2. Higher Government fees

As seen above, stamp duty can cost you tens of thousands more when buying a home over building one. Furthermore, if you’re a first home buyer, state governments are less likely to help you with the purchase of an established home. Most states only provide grants to those buying or building a brand new home.

3. Unavailable features

Building a home means you can install all sorts of wild and interesting features. Such features won’t be available in many established properties, so you’ll be restricted in your searches. While features such as a bowling alley will obviously not be readily available, features like a pool or two-car garage may be hard to find in your desired location.


Savings.com.au’s two cents

Chances are even prior to reading this article you knew whether you were going to build or buy your home.

It’s an innately personal decision, with some people dreaming of building their perfect home their entire life, while some people simply want somewhere they can move into quickly which suits their needs.

Whatever decision you make, its important to understand the costs involved with each process. Additionally, compare the pros and cons to nail down which avenue is best for you.

From a money perspective, the numbers in this article should be used as an extremely rough estimate to gain an idea of how much each option will cost. Consider consulting a qualified financial adviser before making any major decisions.

Article originally published May 2020 by Alex Brewster


Photo by Markus Spiske on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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author-avatar
Aaron joined Savings.com.au in 2021. He is a finance journalist with a keen interest in property, the share market, and improving financial literacy in young Australians.

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