Markets and the Structure of the Housebuilding Industry: an International Perspective

Urban Studies, Vol. 40, Nos 5–6, 897–916, 2003 Markets and the Structure of the Housebuilding Industry: An International Perspective Michael Ball [Paper first received, November 2002; in final form, December 2002] Summary. This paper sets out to examine why the modern housebuilding industry is organised in the ways it is and to identify some implications for the wider operation of housing markets. It concentrates on advanced economies and the impacts of market conditions, regulatory constraints, production characteristics, institutional structures and land supply. Widespread differences occur across countries in the ways in which housebuilding is institutionally structured. It is argued that these differences are generally explicable in economic terms and that regulatory practices determine much of the variation. Introduction This paper sets out to examine why the mod- neatly into the standard economics lexicon as ern housebuilding industry is organised in a competitive industry. The well-known the ways it is and to identify some implica- results for a competitive industry from tions for the wider operation of housing mar- the structure–conduct–performance paradigm kets. It concentrates on advanced economies would, therefore, seem to be reasonable hy- and the impacts of market conditions, regula- potheses to apply to housebuilding: namely, tory constraints, production characteristics, that long-run risk-adjusted returns are low institutional structures and land supply. and that housebuilding costs closely reflect At first sight, the discussion seems simple the marginal costs of inputs. In a dynamic and straightforward. Housebuilding is char- framework, there is a cyclical effect with acterised by the existence of a large number supply constraints pushing up builders’ mar- of relatively small firms. They also use pro- gins and their input costs in housing market duction techniques that are labour-intensive booms and depressing them in slumps. Yet, and change relatively slowly. They also are these temporary variations should be limited, ‘flexible’ in order to be able to adapt to given the ease of entry and exit. These con- potentially large variations in output. Gener- clusions make life easy for housing market ally, as a result, scale economies are low, modelling, as the supply side can be dealt which helps both to make entry and exit from with simply by reference to input cost indices the industry relatively easy and to explain the and a cyclical mark-up to reflect changes in small average firm size. builders’ profits. Housing supply, consequently, seems to fit Several characteristics of real-world Michael Ball is in the Department of Real Estate and Planning, University of Reading, Whiteknights, PO Box 217, Reading RG6 6AH, UK. E-mail: [email protected]. 0042-0980 Print/1360-063X On-line/03/05/60897–20 2003 The Editors of Urban Studies DOI: 10.1080/0042098032000074236 Downloaded from usj.sagepub.com at UNIV OF GUELPH on April 2, 2015 898 MICHAEL BALL housebuilding, nevertheless, seem to be at they cannot be the full answer to the compet- variance with the simple competitive model. itive puzzle. Housebuilding market contexts, First, housebuilding takes on a number of prevailing technologies, input costs and input different institutional forms across and availability need to be explored in greater within countries. There is remarkably little depth. international information, or data, on the na- ture of housebuilding industries in the oceans Housing Output Variations of housing-related international information, but sufficient exists to know that housebuild- Housebuilding is well known as a cyclical ing industrial structures vary quite consider- industry with variations in output and prices ably. Secondly, firms adopt strategies and, driven by cycles in the housing market as a from experience, know that they are import- whole. Such volatility is typical of a con- ant in determining profit outcomes. Further sumer durable or investment goods industry features could be elaborated, but these two where the existing stock of a good is far are sufficient to highlight the puzzle. greater than current output of it. New hous- Namely, how are these characteristics poss- ing represents only a relatively small per- ible, if the simple competitive market model centage of all the houses bought and sold in is correct? With competition, there should be mature housing markets. In the UK, for ex- strong pressures to create similar types of ample, new building averages only around 15 firms rather than the observed international per cent a year of total owner-occupied house diversity. Furthermore, strategic behaviour sales. With such low ratios of new output to can have no effect on market outcomes in the the existing stock, changes in overall housing purely competitive model (Martin, 1994). demand tend to induce large variations in the The competitive model, none the less, demand for newly built housing. This is be- would predict some industry differences. As cause new building is the prime source of housebuilding techniques are widely known, extra housing to accommodate any increases it would suggest that housebuilding indus- in overall housing demand. It takes a long tries vary primarily due to differences in time, moreover, to build sufficient houses to relative input prices between countries. For satisfy demand increases, so that when de- example, high-wage countries should adopt mand grows, prices rise in response to short- less labour intensive techniques and, so, have ages and overshoot their long-run production processes reflecting that fact— equilibrium levels as households try to find with, for example, a greater use of off-site homes before supply has caught up. fabrication and on-site equipment. Such Housing market cycles are an inevitable choice-of-technique influences help to deter- consequence, therefore, of housing supply mine the character of housebuilding indus- mechanisms (Ball and Morrison, 2000). The tries between countries. For example, extent to which volatility occurs more in high-wage, timber-rich North America and prices or in levels of housebuilding depends Scandinavia have housebuilding industries on the extent to which extra housing can be relying on large-scale suppliers of pre-manu- supplied when prices rise and the speed of factured timber-frame systems and exten- that response. sively use pre-assembled modules of internal One reason why house prices fluctuate house fittings. In contrast, high-wage but more than the prices of many other durable timber-poor, the Netherlands and France goods arises from the structure of housing more commonly adopted concrete panel off- markets. In industries like cars and domestic site fabrication for house structures. Such appliances, which also face similar ‘stock- differences affect labour skills mixes, adjustment’ demand characteristics, econom- amongst other things, but they do not negate ies of scale in production tend to generate the general hypothesis of small, flexible oligopolistic industrial structures. These en- building firms with no strategic options, so able firms to hold prices relatively steady Downloaded from usj.sagepub.com at UNIV OF GUELPH on April 2, 2015 MARKETS AND THE HOUSEBUILDING INDUSTRY 899 during downturns in demand. They prefer to cussed above. However, there are several key accept the resultant possibly greater demand features which have longer impacts. fluctuations in volumes in order to sustain the They include variations in household num- margins necessary to finance their large bers generated by population and social amounts of fixed capital. Such strategies are changes; migration into prosperous regions; not realistic in housebuilding, because of the technologies of living (the tram/streetcar, the ease of entry and exit and the competition in bus and the motor car being the most histori- the housing market from existing housing cally notable ones); previous shortages owners. This means that, in downturns, there caused by catastrophic events like war; and are always large numbers of suppliers pre- public policy towards such matters as subsi- pared to cut prices for a quick sale when dies and tax-breaks for particular types of financial pressures dictate. housing. These when combined together tend This pricing characteristic of house- to create housebuilding ‘long’ cycles that are building is ignored by those who, over the superimposed on the business cycle. Many of decades, have argued that housing pro- these longer-term factors are extended lag duction should become far more capital- responses to specific demographic, techno- intensive, like a ‘real’ consumer goods logical or policy ‘shock’ events, which industry. Unless supported by huge public makes it difficult to generalise about house- subsidies, housebuilding firms that attempt to building long cycles, though many have become highly capital-intensive in their pro- tried. They tend, however, to be important duction methods almost certainly go bust influences on the structure of contemporary during the next major downturn. Despite this housebuilding industries through their effects characteristic of housebuilding, huge experi- on the overall level and type of housing ments in manipulating housebuilding de- demand. mand to smooth output fluctuations were The short and long cyclical behaviour just undertaken in a number of European coun- described can be seen in the graphs in Figure tries from the 1950s to the 1970s by taking 1ofthe share of housing investment in na- advantage of social housebuilding pro- tional

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