The Impact of Competition, Subsidies, and Taxes on Production and Construction Cost: The Case of the Swedish Housing Construction Market

Abstract

Few empirical studies focus on developing data and analyses on the factors that influence the decision making process of builders, developers and landlords. Interest subsidy, taxes, and competition are some of the factors that can influence the level of construction or production costs and ultimately the price of the housing units produced. Different subsidy schemes and value-added taxes (VAT) have been used as tools to increase housing construction in Sweden. However, their effect on costs of the housing stock has not been rigorously examined in the current housing supply literature. The aim of this paper is to investigate the relationship between production and construction cost and its determinants especially their relationship to different subsidy schemes and value-added taxes. In our econometric analysis, we utilize a quarterly panel data that covers 1975–2004. Our results suggest that there is a positive relationship between subsidies and construction cost and inverse relationship to value added taxes. This could explain why few companies within the housing construction industry raise the cost of production since these companies could manage to transfer some of the tax burden from themselves to the housing developers. Paper goes on to discuss common practices of construction companies that affects production costs.