Land to Asset Ratio In Perth - Are Build Costs Too High?
Newly built houses often have a poorer land to asset ratios, this is sometimes due to smaller lot sizes compared to older properties but is also a function of the high cost or replacement for new buildings. The land to asset ratio is a measure of the value of land as a percentage of the purchase price. For example:
The land-to-asset ratio can be represented by the formula:
Land-to-Asset Ratio} = Land Value / Total Property Value
For example, if the land value of a newly built house is $400,000 and the total property value is $1,000,000, then the land-to-asset ratio would be:
Land-to-Asset Ratio = 400,000 / 1,000,000 = 0.4 or 40%
This indicates that the land represents 40% of the total property value.
For a high quality investment we typically want to see the LAR a minimum of 50%, 60-70% is ideal. New build however typically have a LAR less than 50%, more like 30-40% due to the high build costs and shrinking lot sizes.
We’ve selected a random suburb Alkimos to show this example below. You can see a bunch of vacant land prices with small lot sizes from Peet and then also the median house price of $607,436 courtesy of www.onthehouse.com.au
Current build prices in Perth mean you won’t get much change from $350,000 for a turn key new house, and this can range anywhere up to around $600,000 for a standard townhouse or higher depending upon the specification of the build. This means any new house being built based upon the numbers shown above will have a LAR of 50% at best.
Most older houses have larger lots and larger houses than new houses being constructed for comparable costs. We’re still at a point in a lot of suburbs where it’s cheaper to buy an existing house than it is to build, meaning we’re buying houses below replacement cost. In some suburbs you can buy a double brick 3x1 house under $350,000 meaning you’re getting the land for free! This is changing, there aren’t many suburbs like this anymore, however we’re still a long way off market parity where we’re paying above replacement cost for houses across the metro area showing Perth still has a way to go with price growth.
