Could Higher Productivity Growth Lead to More Affordable Housing?

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America’s cities have a problem: There isn’t enough affordably priced housing to go around. Today, city leaders and home-seekers alike are frequently left wondering why builders won’t simply build more housing that is affordable to a wider range of incomes, particularly middle- and lower- income households.

For starters, the math doesn’t work. Private developers face an insurmountable gap between the cost of producing new housing and the amount that American households can afford to pay to buy or rent. Many affordable housing options don’t get built as a result. Cites are doing much to help close this gap through financing mechanisms, policy tools and incentives —  but further steps need to be taken to help families better access safe, quality homes.

Now, rather than increasing subsidies, some city leaders are looking at ways to bring the cost of constructing housing down.

The high cost of housing construction is due in part to a persistently low rate of productivity growth within the sector. In economic terms, productivity is a measure of the quantity of output generated for every unit of input. In the global economy, the productivity growth of the construction sector has been outpaced by the manufacturing and retail sectors by rates of nearly 4-to-1 and 3-to-1, respectively.

In Reinventing Construction: A route to higher productivity, the McKinsey Global Institute (MGI) reveals that a whopping $1.6 trillion of economic value is being lost by the global construction sector — one third of which is forgone by U.S. firms alone. Firms with the lowest levels of productivity tend to be some of the industry’s smallest participants who work as trade-based subcontractors on housing and other projects, and struggle with issues of scale and a lack of resources that larger firms may have overcome.

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MGI notes that the low productivity growth rates of smaller subcontractors act as a drag on the productivity of larger firms, and the sector as a whole. Many such firms have few resources to deploy the tech and innovation tools that would help them become more productive. And where competition among firms would usually drive an industry’s least productive rivals to address their key operational and technical challenges, such competitive forces are failing to work as well in construction.

While many of the factors that contribute to low productivity growth in firms must be addressed by the industry players themselves, cities are particularly well suited to address two key macro-level root causes of low productivity growth in construction.

Advancing strategies and policies targeted to modernizing and reshaping restrictive development regulations and increasing industry transparency could lead to greater productivity growth, reduced construction costs, and enable private developers to build and preserve more housing, faster and more affordably than before.

For example, certain zoning and building code restrictions such as minimum lot sizes, parking minimums, and restrictions on the use of modular and manufactured housing add significantly to the cost of housing, act as barriers to the production of new housing units, and inhibit the development and use of innovative techniques and construction processes.

Though opponents of new development raise historic preservation and quality-of-life concerns, evidence suggests that the cost of limiting development through housing regulations may be higher than the cost of any reasonable negative impacts associated with new construction.

California-based pro development affordability advocates recently co-sponsored a bill in the state legislature that effectively rewrites local zoning controls within the state, making it easier to build new housing near intensively used mass transit assets. Though the National League of Cities advocates against state preemption of local government, in this instance, California YIMBY proposes to achieve what cities have be unwilling or unable to achieve — a substantial increase in the supply of affordable and available housing in one of the nation’s most expensive housing markets.

Not only that, the general lack of standardized metrics and information available to housing developers and property owners on the costs of construction and the performance of contractors, within and across markets, has caused the construction industries to be among the most opaque and difficult to navigate in the world.

For instance, when housing developers or owners do not have access to reliable, standardized measures to use in evaluating, comparing, and selecting firms, developers and property owners are at risk of choosing a firm with subpar operational and technical capacity.

An economic climate that both discourages new development and does not support the evaluation of firms on the basis of cost and performance, works as a disincentive to firms to take steps to grow their productivity as a means to achieve a competitive advantage.

A collaborative regional approach to adopting a set of standardized reporting and benchmarking requirements for single-family and multifamily housing contractors could be a logical first step toward increased transparency within the housing construction industries.

Local jurisdictions that do not have established standards for benchmarking and reporting costs and performance data could consider drawing upon, or adopting and incentivizing, the use of the International Construction Measurement Standard (ICMS). Localities that do have established standards should consider adopting ICMS-inspired standards, or another regionally agreed upon standard alongside their existing local standard, so as to facilitate consistent comparisons across markets.

All this may be much to ask from local government alone, but working jointly with construction-sector trade associations and industry players may help local officials to better understand the role that productivity growth and lower costs play in the increased production of a wider range of affordably priced housing units.

Terrah_ready.jpgAbout the Author: Terrah W. Glenn is the Senior Associate for Housing within NLC’s Center for City Solutions.  In addition to pursuing dual Master’s degrees in the fields of urban and regional planning and landscape architecture, Terrah works on the Center’s full range of research priorities with special emphasis on the areas of affordable housing, urban innovation, sustainability, and economic development.