diff --git a/rules.mak b/rules.mak
index d5c516caff..575a3afdff 100644
--- a/rules.mak
+++ b/rules.mak
@@ -26,8 +26,13 @@ QEMU_CXXFLAGS = -D__STDC_LIMIT_MACROS $(filter-out -Wstrict-prototypes -Wmissing
 # Flags for dependency generation
 QEMU_DGFLAGS += -MMD -MP -MT $@ -MF $(@D)/$(*F).d
 
-# Same as -I$(SRC_PATH) -I., but for the nested source/object directories
-QEMU_INCLUDES += -I$(<D) -I$(@D)
+# Compiler searches the source file dir first, but in vpath builds
+# we need to make it search the build dir too, before any other
+# explicit search paths. There are two search locations in the build
+# dir, one absolute and the other relative to the compiler working
+# directory. These are the same for target-independent files, but
+# different for target-dependent ones.
+QEMU_LOCAL_INCLUDES = -I$(BUILD_DIR)/$(@D) -I$(@D)
 
 WL_U := -Wl,-u,
 find-symbols = $(if $1, $(sort $(shell $(NM) -P -g $1 | $2)))
@@ -61,7 +66,9 @@ expand-objs = $(strip $(sort $(filter %.o,$1)) \
                   $(filter-out %.o %.mo,$1))
 
 %.o: %.c
-	$(call quiet-command,$(CC) $(QEMU_INCLUDES) $(QEMU_CFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) $($@-cflags) -c -o $@ $<,"CC","$(TARGET_DIR)$@")
+	$(call quiet-command,$(CC) $(QEMU_LOCAL_INCLUDES) $(QEMU_INCLUDES) \
+	       $(QEMU_CFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) $($@-cflags) \
+	       -c -o $@ $<,"CC","$(TARGET_DIR)$@")
 %.o: %.rc
 	$(call quiet-command,$(WINDRES) -I. -o $@ $<,"RC","$(TARGET_DIR)$@")
 
@@ -74,16 +81,24 @@ LINK = $(call quiet-command, $(LINKPROG) $(QEMU_CFLAGS) $(CFLAGS) $(LDFLAGS) -o
        $(version-obj-y) $(call extract-libs,$1) $(LIBS),"LINK","$(TARGET_DIR)$@")
 
 %.o: %.S
-	$(call quiet-command,$(CCAS) $(QEMU_INCLUDES) $(QEMU_CFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) -c -o $@ $<,"CCAS","$(TARGET_DIR)$@")
+	$(call quiet-command,$(CCAS) $(QEMU_LOCAL_INCLUDES) $(QEMU_INCLUDES) \
+	       $(QEMU_CFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) \
+	       -c -o $@ $<,"CCAS","$(TARGET_DIR)$@")
 
 %.o: %.cc
-	$(call quiet-command,$(CXX) $(QEMU_INCLUDES) $(QEMU_CXXFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) $($@-cflags) -c -o $@ $<,"CXX","$(TARGET_DIR)$@")
+	$(call quiet-command,$(CXX) $(QEMU_LOCAL_INCLUDES) $(QEMU_INCLUDES) \
+	       $(QEMU_CXXFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) $($@-cflags) \
+	       -c -o $@ $<,"CXX","$(TARGET_DIR)$@")
 
 %.o: %.cpp
-	$(call quiet-command,$(CXX) $(QEMU_INCLUDES) $(QEMU_CXXFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) $($@-cflags) -c -o $@ $<,"CXX","$(TARGET_DIR)$@")
+	$(call quiet-command,$(CXX) $(QEMU_LOCAL_INCLUDES) $(QEMU_INCLUDES) \
+	       $(QEMU_CXXFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) $($@-cflags) \
+	       -c -o $@ $<,"CXX","$(TARGET_DIR)$@")
 
 %.o: %.m
-	$(call quiet-command,$(OBJCC) $(QEMU_INCLUDES) $(QEMU_CFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) $($@-cflags) -c -o $@ $<,"OBJC","$(TARGET_DIR)$@")
+	$(call quiet-command,$(OBJCC) $(QEMU_LOCAL_INCLUDES) $(QEMU_INCLUDES) \
+	       $(QEMU_CFLAGS) $(QEMU_DGFLAGS) $(CFLAGS) $($@-cflags) \
+	       -c -o $@ $<,"OBJC","$(TARGET_DIR)$@")
 
 %.o: %.dtrace
 	$(call quiet-command,dtrace -o $@ -G -s $<,"GEN","$(TARGET_DIR)$@")
@@ -359,6 +374,7 @@ define unnest-vars
                 $(eval $(o:%.mo=%$(DSOSUF)): module-common.o $($o-objs)),
                 $(error $o added in $v but $o-objs is not set)))
         $(shell mkdir -p ./ $(sort $(dir $($v))))
+        $(shell cd $(BUILD_DIR) && mkdir -p ./ $(sort $(dir $($v))))
         # Include all the .d files
         $(eval -include $(patsubst %.o,%.d,$(patsubst %.mo,%.d,$($v))))
         $(eval $v := $(filter-out %/,$($v))))