Between the engineer and the human

The sinister secret of the pricing of new buildings

November 30, 2015

Blog

Living costs matter. Finns use on average one-third of their income on living, and due to urbanisation this share is increasing. And that means that there is less money for anything else. This triggers debate on the cost of living and housing. The prices of new housing – now, there’s a good theme for a heated debate!

Building is expensive, that much is true. It’s easy to point a finger at city planning imposing regulations that lead to increased costs. It’s just as easy to criticise Government regulations on civil defence shelters, for example, building codes and slow-working authorities for causing the prices to soar.

For a proper understanding of price formation, we have to distinguish between to terms:

Technical price:

The cost of building.

Market price:

The price that the contractor is asking for and somebody is prepared to pay for the flat or house.

The above discussion relates to the formation of the technical price. The best way to affect it is by easing the regulation, followed by reducing production costs through improving the operations. For example, more lenient regulations for parking in Helsinki means that the technical price of new housing goes down. Converted into technical price, structured parking costs €200–600 per sq.m. of the dwelling, which is a significant effect.

Unfortunately, from the people perspective, the technical price is rather unimportant. As home buyers, we make our decision based on the market prices. All we can do is watch the prices soar. Urbanisation makes sure that the demand always exceeds the supply. On the other hand, price competition is a virtually unknown concept, because all contractors are looking at the prices of housing in the area and setting their asking prices accordingly. What can be done?

Systemic change to major issues always starts with calling the underlying assumptions into question. Why do we allow profiteering to force the prices of a basic commodity (like housing) higher and higher? Why don’t we organise ourselves and build our own housing? This small change will erase the gap between technical price and market price. Let’s start from there, and then start doing something about the technical prices. Otherwise, we’re just talking into the wind and the contractors still laugh all the way to the bank.

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