A Short Analysis on Construction Costs in New York City.

New York City has one of the highest cost of housing in the world with several contributing factors including land, materials, labor, and regulations.  One of the most significant costs in housing, besides land,  is construction costs.

I have been doing some research on how to reduce construction costs in New York City, both on a macro and a micro level.  On a macro level, it seems like union labor, transportation costs, and the monopoly of licensed plumbers, electricians, and architects have on the market increase construction costs more than necessary.  Yes, licensed professionals do ensure housing is built in a safe manner.  However, the ability to get a plumbing or electrician’s license is unnecessarily difficult, thus creating artificial scarcity.

For example, in addition to taking a test, which should be sufficient  enough to determine one’s knowledge of the City’s Byzantine building codes, one must work under a master plumber’s or master electrician’s license for five years before he can apply for his own license.   This has the impact of limiting the number of people who qualify for taking the tests, and thus artificially limiting the supply of licensed plumbers and electricians.

Where testing is the most common and meritocratic way for determining one’s knowledge, it seems like testing is not sufficient enough for the powerful plumbing and electrician tradesmen in New York City, causing a shortage of licensed plumbers and electricians who can pull the necessary permits and conduct the actual work.

There are several ways to  reduce construction costs including increasing scale, using technology, and ability to in-house core competencies.  However, by increasing the difficulty of obtaining licenses in the necessary professions of plumbing and electric, a small construction company has to outsource and subcontract key areas of the construction process.  By constantly outsourcing plumbing and electric, even though well within the capability of a decent size construction firm, costs are driven up as well as loss of control in scheduling and quality, which all impact the cost of the final product.

At a time when New York City is facing a housing shortage (legally we have been in a housing crisis since World Word 2 and thus the reasoning behind Rent Stabilization Laws), the surest and most time proven answer is to increase housing supply.  The only way to increase housing supply is to decrease cost so the market signals to developers to build more.  In New York City, land prices are abnormally high due to the impact of zoning and NIMBYism.  The cost of construction is abnormally high due to union wages and difficulty in obtaining proper licensing.   We need to lower these barriers of entry for new market participants by up-zoning land near mass transportation, giving contractors the ability to hire more non-union laborers, and make the ability of obtaining plumbing and electrician licenses easier by only requiring a minimum education and test passing criteria.

 

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