Residential Construction Costs and the Supply of New Housing: Finding Consistent Effects of Structure Costs on Homebuilding Activity
UBC Centre for Real Estate & Urban Land Economics Working Paper #96-RULE-002
Posted: 23 Apr 1998
Date Written: May 1996
Theory teaches us that the increases in construction costs should lower the supply of new housing. Yet, empirical research has failed to find a consistent relationship between these costs and housing starts. This paper introduces an entirely new set of micro-data on housing construction costs to study this issue. Quality-controlled hedonic cost series are developed from these data. Housing supply functions and construction cost functions for new single family residences are estimated using these series. The results from this estimation are compared to results obtained using existing cost measures. The research presented in this paper demonstrates that the cost elasticity of housing starts is similar to the price elasticity; material and labor have cost shares of approximately 65 and 35 percent respectively, and that the commercial cost indexes used in existing housing supply studies are biased in a way that affects the parameters of supply estimation. The analysis presented here suggests that this bias is a result of a poor specification of labor costs and a failure to address the endogeneity of construction costs and construction activity.
JEL Classification: L74, R31
Suggested Citation: Suggested Citation