Why You Might Pay a Premium for a New Build Home

Posted 8 April 2019 by Nick Parkhouse

Thinking of buying a new build property? Here’s your guide to why you might pay a premium for it, and how much...

If you’re thinking of buying a new build property, then there’s a good chance that you might end up paying more for it than you would for the equivalent ‘second-hand’ home.

So why do you pay extra for a new build? How much extra can you expect to pay? And will you recoup that premium when you sell? Keep reading for answers to these questions and more in our comprehensive guide.

What is a ‘new build premium’?

If you’re buying a new home, the builder will typically charge something called a ‘new build premium’. This means that you can expect to pay more for a new property than you would if you bought an older property of the same size/in the same area.

A builder will charge a premium for several reasons:

  • The new home is ready to move into
  • You benefit from a guarantee – typically 10 years or more
  • Everything in the property is new and unused
  • The property is likely to be more energy-efficient than older homes
  • The property will ordinarily be built to a high specification.

How much is the new build premium?

A report in 2016 found that the average new home sold for 17% more than a comparable second-hand one. This was up from 15% ten years ago.

In 2018, the monthly house price index from LCPAca found that the average price of a new build home across England and Wales had reached £338,694, and that this was 15.8% higher than buying an existing property.

The research from Countrywide also found that, in recent years, house builders have achieved the largest new build premiums in the cheapest and most expensive housing markets. In addition, developments offering Help to Buy options tend to achieve above average premiums.

Smaller developments (those with less than 10 homes) tend to carry the largest premiums. Over the last five years, new homes in developments of fewer than 10 properties have carried an average premium of 20% compared to existing homes in the surrounding area. This compares to a 16% premium for sites with between 20 and 49 homes and a 14% premium for sites containing 100 homes or more.

Note that the report also noted that you won’t pay a premium for every new property. Countrywide report that around one in five new homes costs no more than a comparable second-hand property.

When am I most likely to pay a new build premium?

If there is a new build development in a town or city’s cheaper neighbourhood, the size of the new build premium will tend to be higher. This is because there is a significant difference in quality between the new properties and the existing housing stock. It also takes into account the effects that regeneration has on the area.

Sometimes new homes are more expensive because builders use higher quality construction materials and better methods than decades ago. In some other areas the premium is determined by the result of the low-level investment which has gone into homes.

Countrywide conclude that: “With refurbishment costs relatively fixed, new homes in places where the cost of doing up a home makes up a bigger proportion of a property’s value tend to carry larger premiums.”

In expensive neighbourhoods, house builders tend to charge a higher premium for new homes as they are pushing boundaries in terms of design and fit-out. Wealthier buyers are more prepared to pay for features and high-quality design that they may not find in second-hand homes in the same area.

You’ll also typically pay a premium for a new build home in a small or exclusive development. Premiums charged for homes in small developments tend to be driven by their rarity. Often, they’re refurbishments of old buildings or bespoke designs for small plots, while sometimes new build homes bring something to a neighbourhood which hadn’t previously been available – like flats in a town of terraces.

Will I still benefit from a new build premium when I come to sell my home?

If you sell a new build property within a few years of buying it, you may still be able to charge a premium for it.

The amount of this premium will depend on how both the property and the wider development have aged. The Countrywide report found that when the average new home is sold on for the first time it commands around half of the premium it did when it was sold as new for the first time.

However, around a quarter of new homes (generally ones in the very best developments) are able to hold on to their new build premium for life.

Other schemes see their premium eroded within the first seven years; the average time someone owns a new build home.

For most new homes, the answer lies somewhere in the middle.

While the length of time a premium lasts can vary, in recent years developers are getting better at building homes that hold onto their new build premium for longer. The average home built in the 2000s holds on to twice as much of its premium compared to a home built in the 1990s.

You may also benefit from a higher premium when you come to sell your new build home if you bought in a smaller development. This is because small developments avoid competition from later phases of the same scheme.

Builders of bigger schemes often find their new homes competing with almost identical ones being sold by sellers who bought into the first phase.

 

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