For those in the political center, housing policy is primarily viewed from a supply angle. We need to build more so that prices come down, goes the mantra. New housing construction and its affordability is inherently linked to housing productivity, i.e., how much share of a building a worker can build in an hour, or more elegantly, a workers gross value added per hour (which accounts for quality related aspects of new housing).

Housing productivity is down everywhere in the developed world. One reason that is often cited is the Baumol Cost Disease, i.e., productivity in labor-intensive sectors is stagnant and thus the cost of products produced or services rendered increases faster than inflation. With much of the work unautomated and provided custom-made on site, the construction sector is a case in point, almost as intuitive as the hairdresser usually chosen an an example.

However, a significant explanation for falling productivity is also related to its measurement. If a builder sells you a prefab house and assembles it on site for you (with some additional material), much of the gross value added is now accounted for in intermediary goods, causing overall productivity to fall.

I first came across this interesting debate while listening to an episode of the Ezra Klein Show a while back. Jake Auchincloss, a member of Congress from Massachusetts, suggested the Cost Disease in construction is one of the main drivers of the cost of living crisis. And hence the way to alleviate this problem is by getting more prefabricated housing into the mix.

I tend to agree somewhat with this if you look at this purely from a supply angle (and one shouldn’t). Even if it brings down the measured productivity of the construction sector as measured by gross value added, it shouldn’t distract from the fact that the overall housing productivity usually increases with more prefab in the mix.

A recent report from the Productivity Commission provides a good snapshot of this debate here in Australia. With a suburban typology dominant in the big cities, most people live in their custom homes. These are often painstakingly renovated and maintained despite the advantages of a more tabula rasa prefabricated approach. Prefab accounts for less than 10% of new housing on top of this.

Prefab has long been the promised cure to housing shortages. I remember reading about it during my time in Japan, when the Ministry of Construction tried to deploy significant numbers of units after the war had ended. The Metabolists picked it up in the late 1950s/1960s in their organic and flexible designs for cities and buildings.

The technology has improved significantly in the last 20 years, primarily in terms of design tools, manufacturing, materials and speed. If done properly, prefab housing could help massively on the way to achieve net zero: less waste, economies of scale to manufacture and use better materials and be more energy efficient in the production process, e.g., by deploying solar.

Despite this progress, however, significant obstacles to the mass deployment of prefab housing remain, but they’re primarily institutional and political. They include zoning and other regulatory barriers, financing and insurance limitations for prefabs as well as inertia in the industry (unions, large construction conglomerates and developers all having an interest in maintaining the status quo) are only some of the factors.

The ABC recently ran a comprehensive article summing up the state of prefab in Australia.

An interesting field I’d be keen to follow in the future. For some more advanced economic reading, I have recently subscribed to a few Substacks, including Fresh Economic Thinking, which discusses the productivity in significant detail and on whose posts some of the ideas above relied.

PS: Recently a story caught my eye in the Guardian, suggesting that median rents have as of late actually been a drag on inflation, i.e., increased at a smaller clip than general prices. Even incomes have grown faster, so that the average renting household now spends 26% of their income on rents today vs. 28% a few years back. While life is still hard for those renting households that are moving, and those renting for the first time, this is an important data perspective we need to consider and avoid building intellectual strawmen. The (rental) housing crisis exists primarily for young and short-term renters in bigger cities. The unavailability of subsidized social housing is a rather separate debate.