A couple of years ago, I had a conversation with a young married couple, then looking for a house. One view after another, they couldn’t find anything within their budget. They threw up their hands in the air, almost giving up. What they actually needed was guidance, and the ensuing conversation a republication to what ended in closing a nice deal. Here is a recall of the first conversation ahead of the second, and more important conversation which focuses on navigating a great house purchase deal in Ga Mashie, our beloved city of Accra.
Maame Esi and Kofi were both quiet on the drive back, this was the 9th viewing they had been to, and the house hunting they started excitedly had evolved into almost a chore of finding their dream home. Today’s drive was one of resignation after several mathematical formulae, calculations, additions and subtractions; they still hadn’t been able to strike a fine balance between location, size and price to be able to purchase a desirable house, a house they could call their home. In the midst of the silence, Maame Esi – out of frustration – shouted: “Why are houses prices in Ghana so high?”
“Well Maame, price is relative, depends on your pocket”, I tried to lighten the mood when they called me on the phone as they made the frustrating journey back to their rented apartment. “Come on Nii, even a basic 2-bedroom house on the outskirts of town is going for US$80,000 on the average. Nii, how do you justify that, how?” Maame’s frustration grew. “So what do you think is causing the pricing to be unreasonably high Maame?” I asked. Kofi, being the gentlemen that he is, stepped in to further his wife’s argument: “Nii, I think it’s the profit margin that developers slap on the house prices; it’s ridiculous and we have heard even 60 percent, that’s just a rip-off”.
“Ok ceasefire,” I intervened. “I think I have an idea that will give us a better understanding of house pricing. Make no mistake, I do agree in principle that house prices are relatively high, but are they unreasonably or unjustifiably so? Maame and Kofi, we are going to simulate building a house and hopefully that will give you control of the build elements. When we are done, we can then reject or accept your ‘hypothesis’. So let’s look at the build elements that form the pricing structure, shall we?”
Land and infrastructure cost
The first thing that will probably come to your mind is the fiscal cost of the land – i.e., whether it is US$10,000 or US$100,000 dollars. Yes, that counts; and it is an expense that is passed on to future buyers. However another cost, the unseen cost is the regularisation of the title to ensure it’s clean and devoid of encumbrances. This process involves extra costs of time, other legal fees and social fees paid to self-appointed land guards. So let’s say you want to build in prime East-Legon; even conservatively, a plot is about US$150,000 while other lands in outskirts of Accra are going for an average of US$15,000 per plot. So kindly do keep these in mind while we look at other factors. Also, do keep in mind that developers would also pass on infrastructure development costs for new areas where they build infrastructure like roads, water and electrical connections from scratch.
Material cost
This component of the pricing structure contributes a great deal to the pricing of houses. Stay with me for a minute and let’s break this down. So first let’s pick an ideal size for a 3-bedroom house to give you an idea. Most houses are measured in square metres; and for the uninitiated, that will be length multiplied by the width in metres. For a 3-bedroom, the average size on the market now is about 150 square metres. And to give you further clarity, that’s about five 40ft containers put together. Now that we have our ideal size, we need to decide whether we are going to build basic, e.g. with louvre blades or standard with sliding windows or luxury with all the smart devices and fittings. Since we can’t compile all the exact components, we can resort to the industry practice of using the average cost build per square metre to estimate the cost in relation to a basic (US$400 per square metre), standard (US$800 per square metre) and luxury (US$1,200 per square metre) builds. Please note these estimates are very conservative.
I hope I haven’t lost you. Please stay with me; here’s a quick recap – we are building a 3-bedroom, sized 150 square metres and depending on your taste, we will calculate the average build cost at basic level, standard or luxurious level. These are conservative figures and are informed by the cost of importing most of these building materials with their attendant high shipping and duty charges, tax, insurance, bank transfer and interest charges – which all go to affect the price of a home. In Ghana especially, where an estimated 70 percent of building materials are imported, you can imagine how big a factor it is in the final price determination. So, Maame and Kofi, now that you have a better grasp of the material element, shall we attempt to estimate the build cost minus land cost? “Yeah let’s do it”, they said excitedly. So, I am assuming you will want a standard build calculated at US$800 which, multiplied by our agreed size of 150 square metres, translates to US$120,000. That is another figure to keep in mind.
Labour and other professional fees
Kofi and Maame, this area is your bone of contention isn’t it? Okay! so let’s break it down a bit. In simple terms, the contractor and all other sub-contractors as well as on-site hands will also have to be compensated. There are also architectural fees that will also need paying as well as any bank finance charges on loans taken to fund the construction. These are the other variables that the developer will consider in fixing his margin to be able to make an adequate compensation on his venture. Even if we calculate a 30 percent profit margin on just the land and building material costs alone, US$280,000 (150,000 +120,000), that works out to an additional US$84,000; thus bringing final price to US$364,000 conservatively.
So, what do you say Maame and Kofi? Will you say the price is too high still? The land component in the price for a house in this specific example in the East Legon area was clearly the biggest contributor to final price. The compromise solution by developers is, thus, to utilise land space as much as possible so the land cost is spread out on more units within the same land space, thereby reducing the final selling price per unit. The reality is, until we start consuming local building materials and effect a state policy that will regulate acquisition and easier access of lands, enjoy favourable finance terms or access to cheaper funds, house prices will be high and it’s up to the final consumer to let something give – be it space or location – to strike a balance between their desire and price. What do you think Kofi? …. Kofi? … are you there? Hello kofi! Talk to me Maame!
Line dead! Join us for the concluding part next week.
The writer is the Executive Director of Yecham Property Consult
& Founder of Ghana Green Building Summit.
Email: [email protected]
Linkedin: Cyril Nii Ayitey Tetteh
