Rising labor costs drive up the price of home construction

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A new analysis of the housing market has revealed that significant differences in the price of labor have become the main reason for stratifying construction costs across the country.

Construction costs have jumped 23.6% since 2004, according to “What’s Up With Construction Costs?” a new report by BuildZoom economist Issi Romem. The spike in housing costs that began in the mid-2000s at the end of the pre-recession building boom was initially caused by increases in material costs; the continued rise is now mainly a factor in the rise in labor costs.

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Romem notes that the main drivers of construction costs are still “land and local regulations,” the combination of high land prices and a restrictive land use policy. But in particularly expensive subways, labor costs also greatly accelerated the cost of construction.

In expensive, often unionized subways, labor costs are well above the national average. Labor costs in New York are 31.3% higher than the average for the 30 largest cities, 25.6% higher in San Francisco and 16.8% higher in Chicago. The recent construction boom has also been hampered in many cases by a persistent labor shortage, which is driving up wages and costs.

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San Francisco’s construction labor vicious cycle

Romem’s research led him to speculate about another reason why high-cost coastal cities such as San Francisco are seeing rising construction costs: a shift toward more renovations, which he observed by plotting the assessment of labor costs and the share of building permits corresponding to new construction.

Because zoning and other regulatory restrictions make building new homes so time-consuming and expensive, the San Francisco market has recently focused on renovations. In terms of labor costs, remodeling, repairing, and restoring older buildings can be more timely and labor intensive than building new homes. For this reason, Romem believes that this phenomenon has put upward pressure on labor costs in the San Francisco market and created a vicious circle. Fewer new homes lead to higher labor costs, which makes building new homes more expensive (unattractive residential development, when higher wages are taken into account, becomes less attractive).

As the pool of potential buyers becomes richer and more selective due to rising market costs, the need to upgrade older homes to be competitive drives additional renovations.

Romem is torn on whether to consider this a problem or not; rising costs lead to better wages and increased earnings for Bay Area workers.

Future of construction costs

Romem doesn’t foresee any immediate relief on the horizon, especially in cities with restrictive zoning and building codes that make it harder to create new housing supply. But he sees loosened zoning and a later ramp-up in construction as a way to quickly reduce those costs.

Training more workers to meet the labor shortage in the building trades is a useful, but long-term solution. Others see technology as a potential saviour; many startups and new prefab companies have raised funds to develop more efficient construction methods.

Although tariffs did not have a significant impact in Romem’s research, he says the mere threat of further trade action could lead to increased costs.

“Uncertainty about tariffs is as important as the tariffs themselves,” he says. “It could be much more serious in the future.”

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