Thank you for this piece! I think when people discuss construction in the USA they only focus on big infrastructure projects like highways, subways, airports, etc. These make the headlines with cost overruns, decades of time, etc. People wonder why we can't build like other countries, why it takes us 20 years to do one subway vs another country can do an entire system.
But your research shows the side that people don't consider and that is housing. America has relatively abundant and cheap housing compared to other countries and spacious as well. I do think this is a cultural difference also because other countries have people who are ok with smaller places in more urbanized areas vs America has the suburban sprawl effect. So there are unaccounted societal costs as well.
Many countries don't build houses out of timber. In rich countries, I think it's mainly in Japan and North America. Timber is not a proxy for construction costs.
What about land costs? Many of the highest numbers in your charts are for places with high incomes and relatively scarce land. Does "construction cost" include the cost of the land?
I usually assume that land costs increase housing costs (rental or purchase) and that these housing costs increase labor costs. So it was particularly interesting to see that the cost of construction did not correspond to the cost of labor.
I think you are missing the quality aspect correlation with land cost. Where the land is expensive, the builder will generally feel compelled to use it more efficiently - smaller homes, more extensive secondary features which so not translate to living space square meters etc. For example where land is expensive, a 150 sqm home will likely be multi-story so the land use is optimized and the build can save on the plot size he has tu purchase. This will not show-up if only the living space meters are measured but will have a significant effect on the construction complexity and costs with only a limited correlation to the construction quality itself and no correlation to the efficiency of the building sector.
Places with higher labor costs also have higher land costs, and the cost of the land determines the cost of the house. Banks and investors have a ratio, so that if the house has to cost some multiple of the cost of the land. Houses that get financing in high labor cost areas tend to be larger and have fancier features. Both of these lower the cost per area mitigating the higher hourly labor costs.
AREA - House costs do not rise linearly with area. If you double the area, the length of the walls goes up by the square root of two. The labor needed for many types of flooring and roofing is often about the perimeter: how many cuts, fitting the molding, the tedious detail work. The cost of excavation, foundation, water and septic includes a lot of fixed items in addition to some per area costs. If you double the size of a bathroom, you can spread the labor cost of the plumbing, HVAC and electric (almost fixed) and the tiling (area + linear) over that greater area.
FEATURES - You can make a similar argument about fancier features. It may even be stronger. It takes a plumber the same time to install solid gold faucets as cheap hardware store ones. Kitchen cabinets made of smuggled Brazilian rosewood take no more labor than oak or maple. Bathrooms and kitchens tend to be labor sinks, but they account for only a small fraction of a house's footprint. Similarly, installing a larger or fancier heat pump and/or furnace does not drive up labor costs.
So, I'll propose a theory. Land costs drive labor costs and house costs. House costs drive house areas and fancier features. Larger house areas lower the per area cost. Fancier features have minimal effect. The overall result is that people in higher wage areas tend to live in larger, fancier houses, but the per area cost is relatively flat. The mix of more area and fancier features may vary geographically, but they both help control per area costs in the face of more expensive housing.
Brian, I don't know where to begin my compliments and my thanks for providing all this. I came here because of Austin Vernon's post that was linked at Marginal Revolution. I feel like Harry Potter getting off the train at Hogwarts. As an architect, some of the material here is the perfect counterpoint to the mumbo-jumbo techno optimism that persists in my field.
For comparison, base residential building cost in Bermuda (most expensive place to live, apparently) runs approximately $6,000 per square meter, not including land. Concrete is $250/m, there is no wood construction. Broadly compliant with IBC, with supplemental regulations for hurricane resistance and rain water harvesting.
Very late comment: I suspect the housing price comparison ought to take population density into account to some degree. Comparing on a per sqft basis will of course end up with the US looking cheaper than denser European countries - smaller buildings have a higher per area cost, as you've noted in other posts.
Thank you for this piece! I think when people discuss construction in the USA they only focus on big infrastructure projects like highways, subways, airports, etc. These make the headlines with cost overruns, decades of time, etc. People wonder why we can't build like other countries, why it takes us 20 years to do one subway vs another country can do an entire system.
But your research shows the side that people don't consider and that is housing. America has relatively abundant and cheap housing compared to other countries and spacious as well. I do think this is a cultural difference also because other countries have people who are ok with smaller places in more urbanized areas vs America has the suburban sprawl effect. So there are unaccounted societal costs as well.
Overall great piece!
This would be a good paper to discuss!
Miller, T., (ed.), (1995), Multifamily housing in the USA & Sweden – A Comparative Study,
Trelleborg, The Swedish Federation for Rental Property Owners.
Happen to have a copy? None of my usual sources have it.
Many countries don't build houses out of timber. In rich countries, I think it's mainly in Japan and North America. Timber is not a proxy for construction costs.
*Material
What about land costs? Many of the highest numbers in your charts are for places with high incomes and relatively scarce land. Does "construction cost" include the cost of the land?
I usually assume that land costs increase housing costs (rental or purchase) and that these housing costs increase labor costs. So it was particularly interesting to see that the cost of construction did not correspond to the cost of labor.
Hi Soren- These costs would be for the building itself, independent of the land.
I think you are missing the quality aspect correlation with land cost. Where the land is expensive, the builder will generally feel compelled to use it more efficiently - smaller homes, more extensive secondary features which so not translate to living space square meters etc. For example where land is expensive, a 150 sqm home will likely be multi-story so the land use is optimized and the build can save on the plot size he has tu purchase. This will not show-up if only the living space meters are measured but will have a significant effect on the construction complexity and costs with only a limited correlation to the construction quality itself and no correlation to the efficiency of the building sector.
Places with higher labor costs also have higher land costs, and the cost of the land determines the cost of the house. Banks and investors have a ratio, so that if the house has to cost some multiple of the cost of the land. Houses that get financing in high labor cost areas tend to be larger and have fancier features. Both of these lower the cost per area mitigating the higher hourly labor costs.
AREA - House costs do not rise linearly with area. If you double the area, the length of the walls goes up by the square root of two. The labor needed for many types of flooring and roofing is often about the perimeter: how many cuts, fitting the molding, the tedious detail work. The cost of excavation, foundation, water and septic includes a lot of fixed items in addition to some per area costs. If you double the size of a bathroom, you can spread the labor cost of the plumbing, HVAC and electric (almost fixed) and the tiling (area + linear) over that greater area.
FEATURES - You can make a similar argument about fancier features. It may even be stronger. It takes a plumber the same time to install solid gold faucets as cheap hardware store ones. Kitchen cabinets made of smuggled Brazilian rosewood take no more labor than oak or maple. Bathrooms and kitchens tend to be labor sinks, but they account for only a small fraction of a house's footprint. Similarly, installing a larger or fancier heat pump and/or furnace does not drive up labor costs.
So, I'll propose a theory. Land costs drive labor costs and house costs. House costs drive house areas and fancier features. Larger house areas lower the per area cost. Fancier features have minimal effect. The overall result is that people in higher wage areas tend to live in larger, fancier houses, but the per area cost is relatively flat. The mix of more area and fancier features may vary geographically, but they both help control per area costs in the face of more expensive housing.
Brian, I don't know where to begin my compliments and my thanks for providing all this. I came here because of Austin Vernon's post that was linked at Marginal Revolution. I feel like Harry Potter getting off the train at Hogwarts. As an architect, some of the material here is the perfect counterpoint to the mumbo-jumbo techno optimism that persists in my field.
Thank you for this information.
For comparison, base residential building cost in Bermuda (most expensive place to live, apparently) runs approximately $6,000 per square meter, not including land. Concrete is $250/m, there is no wood construction. Broadly compliant with IBC, with supplemental regulations for hurricane resistance and rain water harvesting.
Very late comment: I suspect the housing price comparison ought to take population density into account to some degree. Comparing on a per sqft basis will of course end up with the US looking cheaper than denser European countries - smaller buildings have a higher per area cost, as you've noted in other posts.
Hi, great post, and I'm enjoying exploring the archives too.
I just wanted to point out that I featured this post here:
https://www.libertyrpf.com/p/241-cloudflare-q4-streaming-churn
Cheers 💚 🥃
Very interesting, thank you! 💚 🥃