Why are there so few economies of scale in construction? Part I

https://constructionphysics.substack.com/p/why-are-there-so-few-economies-of

by danboarder • 4 years ago

95 84 4 years ago

constructionphysics.substack.com

webnrrd2k• 4 years ago

I don't know much about this field, but I'm not sold on the arguments... one thing that seems like a problem is that they are equating a buildings "cost to build" with "price sold". I'm not sure that its a good comparison. For example, even if someone could build a house for $1, it would still be sold based on the costs of the houses near it in the neighborhood. That's part of the way people determine house prices.

readthenotes1• 4 years ago

Plus, sq ft is a very rude way to compare buildings.

nemo44x2• 4 years ago

Agreed - kitchens and bathrooms cost much more than an empty room. Homes with lots of windows cost more as well. And then you need to consider other aspects like the quality of existing materials, how far away from replacement they are, etc. Where I live no one really uses square feet because the land is so expensive as well and the homes are old and 1 may be recently renovated and another may need $400k+ in renovation work.

88840-88552• 4 years ago

Yup, my observation confirms your hypothesis.

The new houses in my neighborhood were all built 2017. There are 120 units in 2 styles: houses and semi detached houses. They all look identical and they were all built with a lot of economies of scale.

The price 2015 was: 500.000 Euro for the semi detached units.

The price 2022 is: 1.3 million.

The neighborhood did not change, the infrastructure did not improve. Nobody can explain you a logical reason (except of EcOnOmiNCs) why the house price exploded. Fine, some construction risk was prices in, let's be it 10%, also risk of default and other factors 10%. That explains 650k.

My boomer parents came, watched and complained: terrible houses, all look same, no garden, no basement, tiny garage, too close to the neighbors. They bought their house back than for 230k!

And there was this amazing time in Germany where prices for houses did not increase. They stagnated and even slightly dropped - which is intuitive as the house is getting older and less attractive!

The American crisis 2008 destroyed everything and it's incredible that until today we are not pointing towards those who's fault it was.

tldr: houses can be build with economies of scale, prices are up because of American politics 2008+

inglor_cz4• 4 years ago

"until today we are not pointing towards those who's fault it was."

Is the rest of the world, including the EU, so helpless and agency-less that it can't recover after a 15 year old event that originated on a different continent?

Unfortunately at least in the EU we seem to be (I am your neighbour from CZ). One of the reasons why so much money flows into houses is that they promise better returns than normal stock (shares of corporations). And that is because our corporations have become sclerotic.

Another reason is the artificially low interest of the Eurozone, designed so that Italy and others do not go bankrupt when servicing their own debt. This fuels a mortgage bubble, but it has zilch to do with America.

The Czech central bank raised interest rates (we do not use EUR yet) and the prices of houses stopped climbing very abruptly. They stabilized on a high level, but they don't grow anymore. Given that there are no buyers anymore, the prices will have to go down.

nemo44x2• 4 years ago

Nobody can explain you a logical reason (except of EcOnOmiNCs) why the house price exploded.

Interest rates falling. As rates go down the price of property goes up. If Europe were to aggressively raise interest rates to 10% then those 1.2 million euro homes would cost about 300k. But the monthly payment would be the same.

Homes cost what people that want to live in an area are willing to pay per month to live there. That means interest, principal, and taxes.

88840-88552• 4 years ago

LOL! i just love it! the post received many upvotes before the Americans woke up. They go up and the negative votes started.

You people are seriously the worst!

The Europeans must get distance to you as much as possible. We have nothing in common.

starwatch• 4 years ago

That's definitely true in the short term.

Now, imagine the secret of the $1 build is available to at least one other commercial builder. The "your margin is my opportunity" aspect of a free market kicks in. There's a high demand for housing, so competing builders compete for the same buyers. Over time it'd drive down the price.

If this doesn't happen it's probably a combination of:

1. limited land available to build on

2. the money chasing uniqueness e.g. unique builds, pretty views, access to schools, etc.

3. price fixing

4. other..?

ben_w• 4 years ago

I'd suggest that #1 is already a strong part of house prices, at least in the UK (despite moving to Germany a few years ago, I've only looked at the end price here not the causes).

If you can reduce the cost of making new infrastructure to a pittance, I'd expect house prices to fall even in the absence of any change to the manufacturing costs.

xnx• 4 years ago

Don't mix up the cost of a house with the cost of the land.

steveBK123• 4 years ago

Exactly. In most HCOL states, the land under the house is anywhere from 50% to the majority of the cost. So if you somehow got the cost of build down say, 50% (unlikely given materials costs too), then your overall cost would still only go down 25% or less.

In most localities, you can get an idea of how the government values your land vs your home from your property tax statement (improved vs unimproved).

eloff3• 4 years ago

It's definately not true. In Vancouver, Canada where there's been a bull market in housing for over thirty years straight, builders make a pretty good living. I've met some earning 250-400k a year. As a software engineer, I felt I was in the wrong business. That profit is part of the cost to build, yes. But it also doesn't have to be that high, that's really enabled by market conditions.

SECProto• 4 years ago

I've met some earning 250-400k a year. As a software engineer, I felt I was in the wrong business.

That's definitely "grass is always greener" thinking, of the same sort that makes others hear about Google project manager salaries and think they should be working as a programmer.

For every one person making 250k+ at a construction company, there are probably a hundred making <100k. Salaries don't go much beyond 120k unless you're in the owner sort of category. And the industry comes along with working 10+ hour days (630am to 5pm is a pretty regular schedule, 4pm on Fridays tho!), outdoors, regardless of weather. And it's physically demanding work

patrick451• 4 years ago

Home builders carry a lot more risk than your average software dev. You read all the time about devs making 250-400k. I'm in that range myself. There is basically no way I can screw up my job that results in anything worse than getting fired. If you are a home builder, you have on-going liability for everything you build. It's not unheard of to hear about somebody getting sued for something they built a decade ago. Imagine if your career could be ruined because code you wrote 10 years ago had a use after free bug?

Fluctuations in interest rates, material costs and the housing market in general means they also have a lot of risk on the business side. This is especially true for those building spec houses.

Honestly, compared to the software world, that profit range sounds too small.

RcouF1uZ4gsC• 4 years ago

IIRC, the suburb developers in the 1950’s achieved economies of scale. They could come in and build a bunch of houses with the same basic pattern/paint/yard etc.

Of course, the downside was that all the houses looked very similar.

thematrixturtle• 4 years ago

You can see the same effect writ even larger in the "commieblocks" that were (and to some extent remain) omnipresent in Eastern Europe and the ex-Soviet Union. But that construction was not driven by market forces, so it's hard to compare.

coryrc• 4 years ago

Apartments in South Korea have been built in a similar way, though they're much nicer to live in.

paganel• 4 years ago

There were “market forces” in play, but they were hidden, so to speak.

Thing is the Soviets and people East of the Wall also had limited resources, like most everyone else when it comes to economics, and as such they had to come with a solution that would work at scale, while using the least amount of resources, while providing a decent amount of service, so to speak (fulfilling people’s desire to live under a roof with their family, for example). The more rational use of building materials, the more was left for using part of those materials for war-related stuff (one can use iron to both build a block of apartments made of reinforced concrete or to make tanks and artillery shells).

There’s this perspective in the West that us here in the East were guessing our way through the entire economic process, which, in many cases of course we were (like it also happens in capitalism), but the system couldn’t have resisted for as long as it did if it had all been left to make-believe or simple educated guesses.

If it matters I live in one of those commie blocks and I quite like it, including the whole ideological concept behind it.

helsinkiandrew• 4 years ago

Reminded me of "The Rise and Fall of the Manufactured Home" discussion on HN awhile ago: https://news.ycombinator.com/item?id=32119828

In Finland 50% of homes are built offsite - assembled from parts constructed offsite - walls/floors/ceiling units etc - both wooden and concrete buildings. Which presumably has a massive reduction in cost. Often I see houses in a unit being built staggered 2 or 3 at a time with a week or so between a new one being started - presumably so as the construction crew/roofers/plumbers/electricians finish on one there's another waiting for them - this must reduce labour costs.

plankers• 4 years ago

Interesting that I haven't seen any discussion of the housing monopolies that were castigated in that study, given how vigorous discussion was on that topic when that study was posted here.

The study largely blames HUD and builders unions for squeezing manufactured home builders out of the market with zoning laws, government programs which favored stick-built housing, and further regulations which make buying and owning a manufactured home undesirable. This discussion of course only applies to the US.

mandelken• 4 years ago

I am curious about your presumption that pre-fab construction “has a massive reduction in cost”. Anecdotal evidence suggests this allows for faster construction on site (as you say) but hardly any costs reduction. From what I gather, the pre-fab units are still constructed uniquely with manual labour, only in a factory hall instead of on site. Extra transportation efforts seem to destroy most of any cost savings. The actual massive line production of standardized units ready for construction does not seem to exist anywhere for house construction, as it exists for other manufacturing. Happy to be proven wrong and learn more though!

onlyrealcuzzo• 4 years ago

IIUC, prefab construction is a labor arbitrage.

If laborers cost 2-3x more in a major city, and you can get laborers to work in a small town 5 hours away for 1/2 - 1/3 the price - then it makes sense.

Otherwise, you're mostly paying for the same amount of labor and a lot of money on shipping - for a small gain in labor efficiency.

stickfigure• 4 years ago

I wonder how much (in the US) sales tax impacts this? Most US states have significant sales taxes on manufactured goods, including prefab housing.

If I pay for someone to build onsite, I pay the labor cost. If that same labor builds offsite and the finished product is delivered, I must also pay sales tax on that labor.

iso1631• 4 years ago

The problem in the UK is that land is the big cost, as there isn't enough allowed in the right areas for building. It doesn't matter if you drop your standard construction of a 3 bed house by £50k, £100k, or even eliminate it completely, the cost of the land would simply increase to compete, because demand is higher than supply, and the cost of a house is set by how much someone is allowed to borrow.

Only when supply does (or even can) exceed demand does competition push prices down to the point where the build cost factors into the end cost

inglor_cz4• 4 years ago

I am just moving into a newly built house (November). I visited the construction site quite frequently in the last year. They built 33 semi-detached houses on a single site at once.

The amount of human work that goes into the process is insane. Trucks help, but most of the work during the building itself is done with hands just like 1000 years ago (laying bricks), only there is a lot more work involved than 1000 years ago or even 100 years ago (all the internal networks in the walls etc.).

Something like that cannot be principally cheap. You cannot really scale up some of those activities. The electrician still needs to spend X hours per house, and hours of a highly paid specialist will show up on the total price tag. Etc.

Imagine a tech world where searches of the Web were done by hand instead of with robots.

algo_trader• 4 years ago

during the building itself is done with hands just like 1000 years ago (laying bricks)

I see you are from the Czech republic (congrats! a nice country!). Are these local or migrant workers?

Also - whats the typical price for a Prague apartment compared to such a house?

inglor_cz4• 4 years ago

Mostly Czechs, partly Ukrainians. But a lot of Ukrainians have gone back to fight in the war. I saw the full buses departing from Florenc. There is some shortage of construction workforce right now because of the war.

The house I mention is in Ostrava, a rust belt city I happened to be born in. Fortunately both me and my wife can work remotely. Prices there are still somewhat affordable, though worse than they used to be.

Prague is, as far as housing prices to average income goes, one of the worst places in the entire EU. Bad.

DubiousPusher5• 4 years ago

In the U.S. this is a little different. Due to the popularity of timber frame houses, air nailers have significantly streamlined many aspects of house building here. However, increased sizes and increased equipmemt have eaten much of the savings from efficiency.

peteradio3• 4 years ago

Timber frame would tend to refer to something a bit exotic, I think you mean stick framing.

analyte123• 4 years ago

Framing is the easy part. Some 5-story apartments by me got framed in a month but took 8 months to be ready for move-in. I can’t think of an air nailer equivalent for wiring, drywall, insulation, sprinklers, flooring, trim, and so on. Painting has gotten easier with sprayers but that’s about it. And there is one startup with a drywall robot for commercial installations.

bergenty3• 4 years ago

Honestly there really should be home scale concrete 3D printers. I know they exist but they should be better and more common by now. Create your model in software, concrete goes in one end and a house gets printed. It could even leave exposed channels for wiring and plumbing.

freshpots• 4 years ago

https://www.cement.org/cement-concrete/paving/buildings-stru... these are not uncommon but concrete is not as cheap as it once was and isn't as environmentally friendly as wood. However, it is very durable and provides great insulation.

IgorPartola2• 4 years ago

They exist and are pretty good. The problem is that concrete is more expensive than lumber.

agumonkey• 4 years ago

I believe hand work can be lightened by a lot. People do too much by bare mechanical force or repetitive gesture. Fordism can happen outside of a plant, and not to drive people sick. But improve things for all parties involved.

fulafel• 4 years ago

The article is about on site construction, no? For the US a better subject of study would be trailer park homes and other current assembly lane construction.

h2odragon• 4 years ago

Their post on mobile homes is worth the time too: https://constructionphysics.substack.com/p/the-rise-and-fall...

kkfx• 4 years ago

The shortest simple explanation IMO is: there is no standard fit or small set of standards fits.

Families have different needs, size, ideas, money. Ground where you build a hose and neighborhood are different, local climate is different. The same dress works mostly on anyone because while we have different taste we have almost the same shape and size (a small set of). A car works almost everywhere in the world for similar reasons, a small set of them suffice to match most needs and desires. Homes does not match at all.

If you are in a not so hot environment with nice weather most of the year you likely want open air spaces, but if the temperature is nice but also rain is a bit frequent you might like open air COVERED spaces, perhaps instead of grass you prefer something that takes less humidity. If the climate is hot you prefer indoor places and direct Sun exposure minimization tricks, BUT it the hot climate have also a big circadian Δt like many continental places/deserts you need also some kind of insulation and a big mass to absorb heat during the day and give back at night. On contrary if you are in a secondary home you might like the little mass as possible to heat/cool quickly. If you are in a moderate cold climate big glass walls are very nice both to be inside like you are outside but heat them home with the Sun... On colder climate there is too little Sun so better reduce thermal dispersion, so little windows or even no windows at all is better. If .... and that's JUST for the climate, at a veeeery high level overview.

Also there is another important part: some countries have much wood and do most part of the houses in wood, there some "standards" fit for scale arrive at the level of semi-finished products like panels, beams etc other countries have industrial capacity and less wood so prefer concrete that demand far less design and precision. Again less options for economy of scale.

The real scale that do not want to happen at scale is flexibility. In the past we have had MANY different machines/tools per different products. Then CNCs came to life and a whole industry of semi-finished products easy to combine like lego bricks rise. We try now (so far with little scale success) to do even better 3D printing, to in theory get better flexibility on the same tech and reduce waste. With such revolutions "artisanal" products can be produced within industry scales setups. And that's is the real revolution "almost there" but not there, not only in construction.

galdosdi2• 4 years ago

Families have different needs, size, ideas, money

Lol no. Most people will take what is available that they can afford, or at least pick what they most like from what is available (you have to live somewhere!)

The share of people who can afford to be very picky to the point of ordering a custom build or paying for a comparable existing home is small. And even if people demand it, it's hard for developers to build very unusual homes because they won't retain their value as well (and thus won't sell for as high a value initially) since the first owner may well like it but may have a hard time finding someone else who does.

As a result people end up even guiding themselves partly from "mainstream" tastes when renovating their own homes, even if they genuinely do not like them, in order to ensure the renovation increases rather then decreases the home value.

Elasticity of demand is really low because everyone wants somewhere to live that's better than the default alternative, living in a cardboard box (or these days, maybe a car) If the entire supply was shacks everyone would get one. If the entire supply was mansions, everyone would get one too (or stay homeless if they couldn't afford it)

That was a small nitpick to be fair. Sites and local conditions are all so so different, and that's the real cause, as you explain very well.

bluGill3• 4 years ago

People do not want their house to look identical to their neighbor's. However ultimately we all have very common needs. Thus nearly every house will have a garage in front, there is is no way to get around the requirement that your house has this feature (at least none you control - good public transport in a mixed use neighborhood would do, but that isn't happening for complex reasons)

Likewise we all want a few bedrooms, and some living space, with a kitchen and bathrooms. Further we all need to have flat walls (round rooms look cool but you can't really use them), and corners really should define the room edge.

There just isn't much room to have significant differences in houses. However cosmetic things are easy to change, and exact layouts can be changed a lot in ways that really not not very significant.

thomasguide• 4 years ago

“Cost per square foot” to build doesn’t take into account land acquisition costs?

Some of the “economies of scale” the author is discussing accrue to whoever in the development partnership contributes land. If a piece of land can support the development of 250 apartments, it is worth a lot more than the same piece of land used for a few single family houses. But, per unit the land cost is still a lot lower for the apartments in a dense area than the single family houses in the sparse area. So it could be cheaper to build lots of apartments, but the owner of the land takes that potential savings as profit (often contributing the dollar value of the land into the dev partnership for a share of the project equity).

The other thing to consider is that multi-unit apartment buildings are exactly that: a multiplication of costs driven on a per-unit basis. Every unit needs a bathroom and kitchen, the most expensive part of any dwelling. Actually per square foot studios are the most expensive to build and larger apartments are cheaper. Airplane hangars are cheap per square foot.

Look at college dorms or Eastern Bloc communal apartments for an example of how resource-constrained institutions delivered inexpensive housing to large numbers of people while benefitting from economies of scale: amortize the high costs of the expensive parts of a building (kitchens, bathrooms) by sharing them between users who get private access to cheaper building features (bedrooms).

Final thing is that buildings are hard to manufacture off site because, well, to put it in stupid terms: they are very big and heavy, and you never really know whether something will work on site until it’s done on site. So each construction site is a purpose-built “building factory” for one building with all the affiliated capital costs, mobilization costs, etc. There is an economy of scale, but it’s in the manufacturing of things that laborers can work with - tools, standardized wood sizes and hardware, bricks, tiles, flooring, screws, nails, etc.

fsloth• 4 years ago

"Final thing is that buildings are hard to manufacture off site because,"

There are lot of pre-built workflows - element based / prefab. Still needs on-site work of course.

bobthepanda2• 4 years ago

To some extent, this is also because our logistics is really centered around shipping containers, and anything significantly larger than that becomes a weird, specialized and expensive thing to transport, so it’s cheaper to do onsite.

(There was a bit of a movement to turn literal shipping containers into rooms or tiny homes, but it turns out it’s quite expensive to modify something that wasn’t supposed to be anything other than a box to have things like windows and doors and plumbing, to say nothing of whatever remediation would be required of the container’s previous life.)

sacrosancty• 4 years ago

My guess is that there really are economies of scale in construction but they're exploited by the manufacturers of materials, not the builders. For instance, builders can now buy a door in its frame instead of hanging it onsite. Also prefabricated wall sections, roof trusses, plasterboard instead of plastering by hand, etc.

bluGill3• 4 years ago

Sure, but those have been going on for many decades already. It is very hard to think of something new that can get such an economy of scale - once something is invented you can't invent it again (unless it didn't work the first time - but in that case most reinventions don't fix any of the original problems and so it doesn't work the next dozen times either). We can do some improvements, but those are chasing diminishing returns.

It doesn't help that people want to live in a house that looks different from the others in the neighborhood. One reason there are so many small builders is each specializes in about 3 houses, and just builds 1 in each neighborhood. They get good at building those houses while never building the same house twice in any neighborhood. If everyone was willing to live in exactly the same house we could scale a little bit more, but not very much.

jillesvangurp• 4 years ago

I'd say mostly the reasons are non technical. There are a lot of amateur house builders that only build their own house. For them, building a house is a one off project. There is no scaling. You build the house and you are done.

For big real estate developers, this is different. However, they have to deal with building codes, NIMBY's, and local contractors, building permits, and the occasional bit of bribes, corruption, nepotism, etc. that is ever associated with large real estate projects. There are a lot of people getting rich from the status quo.

So, standardizing practices is challenging and every project is bespoke and different. And as the article actually suggests, even larger developers don't actually build that many houses either. So, the gains from economies of scale aren't that high for them either. And they in any case have to adapt to local situations in every project.

That being said, prefab housing components are very much a thing these days. And with laminated wood, CNC cutting machines, there is not a lot you cannot construct pretty quickly. Also, it's kind of insane that e.g. a large camper van can be built in a very short amount of time (hours?) and is actually very suitable for living in. And yet we don't have a similarly efficient way of producing housing units. And of course plenty of people end up living in trailers that can't afford normal housing. And some of those aren't necessarily that bad even and they can be pretty roomy and comfortable.

I don't think it's a technical problem. If it was, it would long have been a solved problem. Society simply does not allow people to do cheap and efficient things here but forces them to buy housing at extremely high prices. Otherwise, people would do the obvious thing of getting some old trailer, container or other form of cheap shelter and use it. It's not that hard technically to build something nice that provides a decent level of comfort and shelter. Nor is it very expensive. But it's simply not allowed to do that in a lot of places.

Silicon Valley doesn't have a housing problem but a legislation problem. The same is true for Berlin where I live. Plenty of land here. They could build millions of houses, apartments, etc. here. Nice ones even. But it's not allowed.

nickpinkston• 4 years ago

Yes, this is 100% true, re: it's a political, not technical problem.

I'm optimistic though that the YIMBY movement is actually making an impact, as evidenced by more pro-housing candidates are getting elected (in SF and across the country) and this legislation / regulations are slowly changing for the better.

thinkharderdev2• 4 years ago

It's still a very weird and perplexing phenomenon. Settings aside people living in old shipping containers it just seems like it wouldn't be all that hard to make prefabricated housing that looks more or less identical to houses that actually are built for dramatically cheaper.

rdtwo• 4 years ago

Yeah but you can’t put them in places people want to live. Those places are already full and the land is parceled out. There are no economies of scale building 1-2 houses at a time in Seattle.

mike50• 4 years ago

In my suburban region there are 100 local building departments. I'm not kidding. There are villages that have not allowed for anything new since they were founded in the 1920s. These are inner ring suburbs that have not allowed for essentially any new construction or redevelopment for a hundred years. We literally had one local village attempt to stop the state from expanding the commuter rail system.

andrewl• 4 years ago

Here’s an article about a different approach, where the house is built completely off site and just unfolded and set up in a day:

https://singularityhub.com/2021/07/29/these-foldable-houses-...

didgetmaster• 4 years ago

The article seems to base the cost per sq/ft on the selling price of the homes rather than the actual building costs.

If a builder is able to shave a bunch of costs during construction but does not pass those savings on to the home buyer (instead just pads their profits), then the study would not reflect economies of scale in construction. Homes tend to be priced at what the market is willing to bear in relation to what other similar homes in the area are selling for; not what it actually cost to build them.

closedloop129• 4 years ago

What's the bottom line? How cheap could housing be?

kjkjadksj• 4 years ago

It used to be ordered out of a catalog, flat packed, and mailed to you already cut for assembly.

ultra_nick• 4 years ago

Land value tax would fix this

https://www.weforum.org/agenda/2022/03/land-value-tax-housin...

deanCommie• 4 years ago

In our society today, housing is, for different people:

* A basic human need

* An aggressive financial instrument for wealth creation for speculative investors

* A conservative financial instrument for people's retirement plans

* An outlet for individual nesting instincts and outward manifestations of personal values

* A mechanism for gregarious and luxurious wealth signalling.

There's no one size fits all for these different requirements.

kentlyons• 4 years ago

Design for manufacturing is a big thing in many industries - consumer electronics, auto, etc. It does not seem to really exist for (residential) construction. There are some broad constraints by material sizes, but it seems that in practice so much needs to be figured out and fit along the way.

bluGill3• 4 years ago

Not really. In the US you can get standard 92-5/8 and 104-5/8 studs, this is the correct length for 8 and 9 foot walls, you can get a house built with any other size walls if you want but it will cost extra. The drywall comes in panels that will fit (4 foot, the other is 4'6). Doors come in standard sizes widths in 2 inch increments, but they all have a standard height. (bi-fold doors have a slightly different set of standard sizes). There is of course some material that needs to be custom fit on the way, but most of the material is already pre-sized.

This is innovation that has already happened and taken a lot of time away from what is needed to build a house. If you want to innovate, you have to innovate on top of what has already been done.

whearyou• 4 years ago

Is there an analogue industry where the product is semi custom for each delivery yet had economy of scale?

The closest I’ve had first hand experience with is the B2B analytics buisnesses I’ve run, economies of scale in that case are achieved via standardization of parts of the value chain, but true product level economies of scale where never really in the cards nor achieved. I suppose the closest to that would be the promise of prefab but can see in the comments here that has not panned out

Why are there so few economies of scale in construction? Part I

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