diff --git a/package.json b/package.json
index 909b6cd56..58096d3e4 100644
--- a/package.json
+++ b/package.json
@@ -1,6 +1,6 @@
 {
   "name": "preact-cli",
-  "version": "1.2.0",
+  "version": "1.3.0",
   "description": "Start building a Preact Progressive Web App in seconds.",
   "main": "lib/index.js",
   "bin": {
diff --git a/src/lib/babel-config.js b/src/lib/babel-config.js
index 7a8162f3c..80dcbd424 100644
--- a/src/lib/babel-config.js
+++ b/src/lib/babel-config.js
@@ -1,4 +1,5 @@
 export default (env, options={}) => ({
+	babelrc: false,
 	presets: [
 		[require.resolve('babel-preset-env'), {
 			loose: true,
diff --git a/src/lib/webpack/dummy-loader.js b/src/lib/webpack/dummy-loader.js
index 5155a0702..7f4bd26e6 100644
--- a/src/lib/webpack/dummy-loader.js
+++ b/src/lib/webpack/dummy-loader.js
@@ -1,3 +1,3 @@
 module.exports = function(source, map) {
-  this.callback(null, source, map);
+	this.callback(null, source, map);
 };
diff --git a/src/lib/webpack/transform-config.js b/src/lib/webpack/transform-config.js
index 5568aceb5..6ae9b2c59 100644
--- a/src/lib/webpack/transform-config.js
+++ b/src/lib/webpack/transform-config.js
@@ -17,7 +17,7 @@ export default async function (env, config, ssr = false) {
 	}
 
 	require('babel-register')({
-		presets: ['env']
+		presets: [require.resolve('babel-preset-env')]
 	});
 	const m = require(transformerPath);
 	const transformer = m && m.default || m;
@@ -38,25 +38,25 @@ class WebpackConfigHelpers {
 		this._cwd = cwd;
 	}
 
-  /**
-   * Webpack module used to create config.
-   *
-   * @readonly
-   * @returns {object}
-   * @memberof WebpackConfigHelpers
-   */
+	/**
+	 * Webpack module used to create config.
+	 *
+	 * @readonly
+	 * @returns {object}
+	 * @memberof WebpackConfigHelpers
+	 */
 	get webpack() {
 		return webpack;
 	}
 
-  /**
-   * Returns wrapper around all loaders from config.
-   *
-   * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
-   * @returns {LoaderWrapper[]}
-   *
-   * @memberof WebpackConfigHelpers
-   */
+	/**
+	 * Returns wrapper around all loaders from config.
+	 *
+	 * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
+	 * @returns {LoaderWrapper[]}
+	 *
+	 * @memberof WebpackConfigHelpers
+	 */
 	getLoaders(config) {
 		return this.getRules(config).map(({ rule, index }) => ({
 			rule: rule,
@@ -65,57 +65,57 @@ class WebpackConfigHelpers {
 		}));
 	}
 
-  /**
-   * Returns wrapper around all rules from config.
-   *
-   * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
-   * @returns {RuleWrapper[]}
-   *
-   * @memberof WebpackConfigHelpers
-   */
+	/**
+	 * Returns wrapper around all rules from config.
+	 *
+	 * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
+	 * @returns {RuleWrapper[]}
+	 *
+	 * @memberof WebpackConfigHelpers
+	 */
 	getRules(config) {
 		return [...(config.module.loaders || []), ...(config.module.rules || [])]
 			.map((rule, index) => ({ index, rule }));
 	}
 
-  /**
-   * Returns wrapper around all plugins from config.
-   *
-   * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
-   * @returns {PluginWrapper[]}
-   *
-   * @memberof WebpackConfigHelpers
-   */
+	/**
+	 * Returns wrapper around all plugins from config.
+	 *
+	 * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
+	 * @returns {PluginWrapper[]}
+	 *
+	 * @memberof WebpackConfigHelpers
+	 */
 	getPlugins(config) {
 		return (config.plugins || []).map((plugin, index) => ({ index, plugin }));
 	}
 
-  /**
-   *
-   *
-   * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
-   * @param {string} file - path to test against loader. Resolved relatively to $PWD.
-   * @returns {RuleWrapper[]}
-   *
-   * @memberof WebpackConfigHelpers
-   */
+	/**
+	 *
+	 *
+	 * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
+	 * @param {string} file - path to test against loader. Resolved relatively to $PWD.
+	 * @returns {RuleWrapper[]}
+	 *
+	 * @memberof WebpackConfigHelpers
+	 */
 	getRulesByMatchingFile(config, file) {
 		let filePath = path.resolve(this._cwd, file);
 		return this.getRules(config)
 			.filter(w => w.rule.test && w.rule.test.exec(filePath));
 	}
 
-  /**
-   * Returns loaders that match provided name.
-   *
-   * @example
-   * helpers.getLoadersByName(config, 'less-loader')
-   * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
-   * @param {string} name - name of loader.
-   * @returns {LoaderWrapper[]}
-   *
-   * @memberof WebpackConfigHelpers
-   */
+	/**
+	 * Returns loaders that match provided name.
+	 *
+	 * @example
+	 * helpers.getLoadersByName(config, 'less-loader')
+	 * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
+	 * @param {string} name - name of loader.
+	 * @returns {LoaderWrapper[]}
+	 *
+	 * @memberof WebpackConfigHelpers
+	 */
 	getLoadersByName(config, name) {
 		return this.getLoaders(config)
 			.map(({ rule, ruleIndex, loaders }) => Array.isArray(loaders)
@@ -126,46 +126,46 @@ class WebpackConfigHelpers {
 			.filter(({ loader }) => loader === name || (loader && loader.loader === name));
 	}
 
-  /**
-   * Returns plugins that match provided name.
-   *
-   * @example
-   * helpers.getPluginsByName(config, 'HtmlWebpackPlugin')
-   * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
-   * @param {string} name - name of loader.
-   * @returns {PluginWrapper[]}
-   *
-   * @memberof WebpackConfigHelpers
-   */
+	/**
+	 * Returns plugins that match provided name.
+	 *
+	 * @example
+	 * helpers.getPluginsByName(config, 'HtmlWebpackPlugin')
+	 * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
+	 * @param {string} name - name of loader.
+	 * @returns {PluginWrapper[]}
+	 *
+	 * @memberof WebpackConfigHelpers
+	 */
 	getPluginsByName(config, name) {
 		return this.getPlugins(config)
 			.filter(w => w.plugin && w.plugin.constructor && w.plugin.constructor.name === name);
 	}
 
-  /**
-   * Returns plugins that match provided type.
-   *
-   * @example
-   * helpers.getPluginsByType(config, webpack.optimize.CommonsChunkPlugin)
-   * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
-   * @param {any} type - type of plugin.
-   * @returns {PluginWrapper[]}
-   *
-   * @memberof WebpackConfigHelpers
-   */
+	/**
+	 * Returns plugins that match provided type.
+	 *
+	 * @example
+	 * helpers.getPluginsByType(config, webpack.optimize.CommonsChunkPlugin)
+	 * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
+	 * @param {any} type - type of plugin.
+	 * @returns {PluginWrapper[]}
+	 *
+	 * @memberof WebpackConfigHelpers
+	 */
 	getPluginsByType(config, type) {
 		return this.getPlugins(config)
 			.filter(w => w.plugin instanceof type);
 	}
 
-  /**
-   * Sets template used by HtmlWebpackPlugin.
-   *
-   * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
-   * @param {string} template - template path. See [HtmlWebpackPlugin docs](https://github.com/jantimon/html-webpack-plugin/blob/master/docs/template-option.md).
-   *
-   * @memberof WebpackConfigHelpers
-   */
+	/**
+	 * Sets template used by HtmlWebpackPlugin.
+	 *
+	 * @param {object} config - [webpack config](https://webpack.js.org/configuration/#options).
+	 * @param {string} template - template path. See [HtmlWebpackPlugin docs](https://github.com/jantimon/html-webpack-plugin/blob/master/docs/template-option.md).
+	 *
+	 * @memberof WebpackConfigHelpers
+	 */
 	setHtmlTemplate(config, template) {
 		let isPath;
 		try {
diff --git a/src/lib/webpack/webpack-base-config.js b/src/lib/webpack/webpack-base-config.js
index ccb356fd1..b46be68dc 100644
--- a/src/lib/webpack/webpack-base-config.js
+++ b/src/lib/webpack/webpack-base-config.js
@@ -14,6 +14,7 @@ import autoprefixer from 'autoprefixer';
 import ProgressBarPlugin from 'progress-bar-webpack-plugin';
 import ReplacePlugin from 'webpack-plugin-replace';
 import requireRelative from 'require-relative';
+import createBabelConfig from '../babel-config';
 
 export function exists(file) {
 	try {
@@ -33,9 +34,9 @@ readJson.cache = {};
 
 // attempt to resolve a dependency, giving $CWD/node_modules priority:
 function resolveDep(dep, cwd) {
-  try { return requireRelative.resolve(dep, cwd || process.cwd()); } catch (e) {}
-  try { return require.resolve(dep); } catch (e) {}
-  return dep;
+	try { return requireRelative.resolve(dep, cwd || process.cwd()); } catch (e) {}
+	try { return require.resolve(dep); } catch (e) {}
+	return dep;
 }
 
 export default (env) => {
@@ -48,6 +49,7 @@ export default (env) => {
 	env.manifest = readJson(src('manifest.json')) || {};
 	env.pkg = readJson(resolve(cwd, 'package.json')) || {};
 
+	let babelrc = readJson(resolve(cwd, '.babelrc')) || {};
 	let browsers = env.pkg.browserslist || ['> 1%', 'last 2 versions', 'IE >= 9'];
 
 	return group([
@@ -86,12 +88,10 @@ export default (env) => {
 						enforce: 'pre',
 						test: /\.jsx?$/,
 						loader: 'babel-loader',
-						options: {
-							babelrc: true,
-							presets: [
-								[resolve(__dirname, '../babel-config'), { browsers }]
-							]
-						}
+						options: Object.assign(
+							createBabelConfig(env, { browsers }),
+							babelrc // intentionall overwrite our settings
+						)
 					}
 				]
 			}
@@ -255,7 +255,7 @@ export default (env) => {
 	].filter(Boolean));
 };
 
-const development = () =>  group([]);
+const development = () =>	group([]);
 
 const production = () => addPlugins([
 	new webpack.HashedModuleIdsPlugin(),
@@ -313,7 +313,7 @@ const production = () => addPlugins([
 
 export function helpers(env) {
 	return {
-		isProd:  env && env.production,
+		isProd:	env && env.production,
 		cwd: env.cwd = resolve(env.cwd || process.cwd()),
 		src: dir => resolve(env.cwd, env.src || 'src', dir)
 	};
diff --git a/tests/build.snapshot.js b/tests/build.snapshot.js
index 30eb85049..a289ec1ac 100644
--- a/tests/build.snapshot.js
+++ b/tests/build.snapshot.js
@@ -66,16 +66,16 @@ export default {
 		'bundle.js': { size: 18460 },
 		'bundle.js.map': { size: 101500 },
 		'route-home.chunk.*.js': { size: 1020 },
-		'route-home.chunk.*.js.map': { size: 4283 },
+		'route-home.chunk.*.js.map': { size: 4977 },
 		'route-profile.chunk.*.js': { size: 1660 },
-		'route-profile.chunk.*.js.map': { size: 7504 },
+		'route-profile.chunk.*.js.map': { size: 8607 },
 		'polyfills.js.map': { size: 31750 },
 		'index.html': { size: 870 },
 		'style.css': { size: 1065 },
 		'style.css.map': { size: 2246 },
 		'ssr-build': {
 			'ssr-bundle.js': { size: 18960 },
-			'ssr-bundle.js.map': { size: 91773 },
+			'ssr-bundle.js.map': { size: 97403 },
 			'style.css': { size: 1065 },
 			'style.css.map': { size: 2250 },
 		}
@@ -85,16 +85,16 @@ export default {
 		'bundle.js': { size: 19300 },
 		'bundle.js.map': { size: 105590 },
 		'route-home.chunk.*.js': { size: 1000 },
-		'route-home.chunk.*.js.map': { size: 4285 },
+		'route-home.chunk.*.js.map': { size: 4981 },
 		'route-profile.chunk.*.js': { size: 1650 },
-		'route-profile.chunk.*.js.map': { size: 7507 },
+		'route-profile.chunk.*.js.map': { size: 8609 },
 		'polyfills.js.map': { size: 31800 },
 		'index.html': { size: 850 },
 		'style.css': { size: 1065 },
 		'style.css.map': { size: 2345 },
 		'ssr-build': {
 			'ssr-bundle.js': { size: 19820 },
-			'ssr-bundle.js.map': { size: 95581 },
+			'ssr-bundle.js.map': { size: 101502 },
 			'style.css': { size: 1065 },
 			'style.css.map': { size: 2345 },
 		}
diff --git a/tests/subjects/custom-babelrc/.babelrc b/tests/subjects/custom-babelrc/.babelrc
index fa5b8e976..d30f308f0 100644
--- a/tests/subjects/custom-babelrc/.babelrc
+++ b/tests/subjects/custom-babelrc/.babelrc
@@ -1,6 +1,7 @@
 {
   "plugins": [
     "transform-regenerator",
+    ["transform-react-jsx", { "pragma": "h" }],
     ["transform-runtime", {
       "helpers": false,
       "polyfill": false,
diff --git a/tests/subjects/custom-babelrc/index.js b/tests/subjects/custom-babelrc/index.js
index 0f12696de..c1c4fc867 100644
--- a/tests/subjects/custom-babelrc/index.js
+++ b/tests/subjects/custom-babelrc/index.js
@@ -1,4 +1,4 @@
-import { Component } from 'preact';
+import { h, Component } from 'preact';
 
 const delay = t => new Promise(r => setTimeout(r, t));