The Costs of Construction and Housing Prices: A Full-Cost Pricing or Tendering Theory?

Abstract

While construction costs and housing prices are implicitly examined in the construction economics literature, dedicated studies on their theoretical underpinning are rare. In this study, we investigated the application of different pricing theories in Auckland by testing the relationship between house prices and construction costs in Auckland from 1995 to 2021. The results contrast the tendering pricing theory, which posits that construction prices are optimal mark-ups unaffected by market demand, with the full-cost pricing theory, which acknowledges the market-dependent nature of pricing. By using the Toda-Yamamoto’s granger-causality test and Pesaran’s Autoregressive Distributive Lag (ARDL) bound tests, we analysed the relationship between the house price index (HPI) and construction cost index (CCI). The result suggests a significant relationship between housing prices and construction costs in both the short and long term, supporting the predominance of the full-cost pricing theory in Auckland’s housing market. The finding highlights the potential need for property industry participants to evaluate the market structure of the construction industry, fostering a more competitive environment and paving the way for more effective supply-related housing policies.