Residential prices, housing development, and construction costs

Abstract

This chapter covers the relationships between residential market and housing development focusing on the role that construction costs play as an incentive for housing prices. Attention is paid to the existing links between construction costs and price changes. A specific database is built from real development projects seeking to analyse several cost groups and selling prices. Two non-linear models (average cost model and new supply model) are defined to explore the cost–price relationship using panel regression techniques. The first one identifies components that have negative effects on average costs, highlighting scale economies in those inputs. The second one estimates individual impacts on selling prices of nine cost groups measured in euros and pooled from real projects’ accounting data in a new supply model framework. Results support the existence of scale economies in the cost of pavements and labor, the strong effects of foundation costs on prices, and the existence of sunk costs, that is parts of construction costs which are not reflected in house prices (such as carpentry or painting). It also identifies direct and indirect effects of costs on prices, as in the case of green areas, suggesting that extraconstruction costs incurred by creating housing amenities increase housing prices through affecting demand tastes and the housing quality perception. © 2018 selection and editorial matter, Graham Squires, Erwin Heurkens and Richard Peiser; individual chapters, the contributors.