Raise the Roof, Lower the Costs: Construction Costs and Housing Affordability in New York City

Executive Summary

The challenges that make building in New York City famously difficult have not reduced the level of construction the city has experienced over the past few years. The city's desirability as a place to live and do business, the high incomes earned by its large cohort of accomplished professionals, and the easy availability of credit have spurred an extraordinary building boom that has overcome every obstacle thrown in its way.

There are reasons nevertheless to investigate the causes of the local construction industry's out-of-scale cost structure. First, incomes in the crucial financial sector, on which so many other sectors depend, though still strong in 2007, will probably decline in 2008 due to upheavals arising from the subprime mortgage crisis. Credit of all kinds has become less available. And housing costs have reached a painfully large fraction of income—already in 2006, 40 percent of all New York City households were spending more than 35 percent of household income on rent.

In the face of these potential constraints on demand, the prices of building materials such as steel, glass, aluminum, and copper have shot up, climbing 1 percent per month in 2006, while petroleum-based products such as asphalt keep surpassing earlier peaks. Significantly, perhaps, the number of building permits issued in the first quarter of 2008 was 40 percent lower than it was four quarters earlier. In short, we have probably left a period of rising incomes and demand and entered a period of flattening income growth, some softening in demand for housing, and costs that continue to soar.

These warning signs and trends do not necessarily augur contraction of the construction industry as a whole. Indeed, a major source of cost inflation is the continuing intensity of demand for contractors, subcontractors, and construction supervisors, whose numbers are effectively limited by the city's idiosyncratic rules and procedures. Large public projects and infrastructure repair will keep demand high for the foreseeable future. The issue is not the health of the construction industry but rather whether intense demand in some areas will deny resources to others.

The population segments already bearing the brunt of this cost spiral are those of lower and moderate income. The rejuvenation of neighborhoods such as Bushwick in Brooklyn and the Lower East Side of Manhattan, where ten or fifteen years ago only subsidized housing was being built, has drawn market-rate developers, who have bid up the price of land. Government subsidies that are still available have not kept up with land's rate of appreciation. In any event, the question arises as to whether subsidies should continue to flow to neighborhoods where housing can be built without them.

If the per-unit level of subsidy is no longer sufficient to keep building costs affordable, how does such housing get built, so as to assure the continued residence of population segments vital to the city's economy and diversity? The most important way, and the impetus for this paper, is to identify costs that, first, are within the city's power to control and, second, unduly burden the construction process and thus threaten, in time, to reduce the amount of new construction in this growing city. In an inflationary environment, those costs responsible for project delays are particularly difficult to excuse. Since the amounts of land, labor, and materials available, while not fixed, are certainly finite, savings in some sectors should benefit the economies of others.

The following recommendations meet both criteria mentioned above:

• Reduce delays in construction time, and thus cost, by streamlining the city's regulatory and permitting processes.
• Continue to increase the amount of buildable space available for residential development through rezoning, upzoning, and other techniques.
• Preserve the use of nonunion labor in the construction of affordable housing.
• Reform the state's negligence laws, in particular, those imposing absolute liability on builders for accidents on the job site.
• Monitor the unfolding impact of the recent curtailment of the 421-a tax-abatement program, which has been responsible over the years for spurring building in neighborhoods where it would not otherwise have occurred.

With these steps, New York City can help lay the foundation for a secure future of economic growth.

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