I'll suggest a caveat, though. Most housing is old housing. The economics of new homes aren't as binding as all that. New housing will tend to be used by households with higher incomes, and where there is enough of it, its main effect on affordability is that old homes whose costs have been depreciated and justified already by decades of use will sell at a discount rather than a premium.
Excellently written simple intro to the fundamental problem of construction costs to housing affordability. Have you seen the piece in Construction Physics where it looks like construction costs have risen faster than GDP for ~100 years.
As an aside, I'm encountering a lot more specificity about micro-gradations of use in the building code than I feel like I used to: dance studio is different than tattoo studio is different than painting studio. This creates extra transaction costs and wasted time transferring from one use to another like use, as well as another touch point where you may discover $10k's of additional work required for code compliance. This kind of micro-gradation was a bad habit of late 20'th century zoning ordinance which the form-based movement has had some success in rolling back.
Reform of building codes and seeking lower construction costs is going to be the BIG PROJECT of the next generation of housing and urbanism reformers, the way that zoning was the last generations big (if unfinished) project.
Love the way you presented this angle. This is exactly the way to say "Hey, Yimbys, let's talk about construction costs" that'll makes people think more deeply about the issue. So, know that you've got me thinking about this more deeply...
(1) There's a Yimby position (that not every Yimby talks about or is necessarily aware of) that sees construction costs as partially downstream of regulatory reform. The idea is that under a more liberalized regime with higher and more constant demand for construction labor, more folks would actually enter and stay in the trades and labor costs on a sqft basis might be lower. ie less/better regs -> more demand -> something like economies of scale in production (at least wrt to labor supply).
Question for you: do you have any idea what the breakdown in construction costs is between labor/materials (I know this is idiosyncratic to specific geographies, but if it's almost always 80% or something, then maybe this liberalization -> lower production costs thesis is wrong).
(2) This one is more comment than question :-)
There is a Yimby riposte to this that the cost of new construction is a factor but isn't THE binding constraint on price. The argument is twofold: (1) because filtering and (2) because developers will build themselves off a cliff going into a downturn, so a decent chunk of housing affordability is basically a market error driven process of redistribution from developers/private capital to lucky renters and homeowners. I've personally experienced this phenomenon, but I have no idea if any actual research validates this effect as significant.
Anyway - thanks again for this post, super thought provoking.
Great analysis.
I'll suggest a caveat, though. Most housing is old housing. The economics of new homes aren't as binding as all that. New housing will tend to be used by households with higher incomes, and where there is enough of it, its main effect on affordability is that old homes whose costs have been depreciated and justified already by decades of use will sell at a discount rather than a premium.
I'm amused by AI's rendering of the chimney over the window.
Excellently written simple intro to the fundamental problem of construction costs to housing affordability. Have you seen the piece in Construction Physics where it looks like construction costs have risen faster than GDP for ~100 years.
As an aside, I'm encountering a lot more specificity about micro-gradations of use in the building code than I feel like I used to: dance studio is different than tattoo studio is different than painting studio. This creates extra transaction costs and wasted time transferring from one use to another like use, as well as another touch point where you may discover $10k's of additional work required for code compliance. This kind of micro-gradation was a bad habit of late 20'th century zoning ordinance which the form-based movement has had some success in rolling back.
Reform of building codes and seeking lower construction costs is going to be the BIG PROJECT of the next generation of housing and urbanism reformers, the way that zoning was the last generations big (if unfinished) project.
Love the way you presented this angle. This is exactly the way to say "Hey, Yimbys, let's talk about construction costs" that'll makes people think more deeply about the issue. So, know that you've got me thinking about this more deeply...
(1) There's a Yimby position (that not every Yimby talks about or is necessarily aware of) that sees construction costs as partially downstream of regulatory reform. The idea is that under a more liberalized regime with higher and more constant demand for construction labor, more folks would actually enter and stay in the trades and labor costs on a sqft basis might be lower. ie less/better regs -> more demand -> something like economies of scale in production (at least wrt to labor supply).
Question for you: do you have any idea what the breakdown in construction costs is between labor/materials (I know this is idiosyncratic to specific geographies, but if it's almost always 80% or something, then maybe this liberalization -> lower production costs thesis is wrong).
(2) This one is more comment than question :-)
There is a Yimby riposte to this that the cost of new construction is a factor but isn't THE binding constraint on price. The argument is twofold: (1) because filtering and (2) because developers will build themselves off a cliff going into a downturn, so a decent chunk of housing affordability is basically a market error driven process of redistribution from developers/private capital to lucky renters and homeowners. I've personally experienced this phenomenon, but I have no idea if any actual research validates this effect as significant.
Anyway - thanks again for this post, super thought provoking.
@TheDeletedScenes - I'm interested to hear your comments on this article