Quality change and implications for productivity development:

Housing construction in Sweden 1990-2010

Lena Borg and Han-Suck Song

___________________________________________________________

Working Paper 2013:18

Section for Building and Real Estate Economics

Department of Real Estate and Construction Management
Centre for Banking and Finance (Cefin)
School of Architecture and the Built Environment
Royal Institute of Technology

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 Quality change and implications for productivity development:

Housing construction in Sweden 1990-2010

WORKINGPAPER

Lena Borg and Han-Suck Song

Abstract

Current estimation procedures for computing building price indexes do not in an adequate way
account for changes in the quality of new residential construction which results in upward biases of
price changes, and consequently causes published productivity changes to be too low due to
overdeflation. The aim of this study is to estimate productivity figures that take quality changes into
account. Knowledge about the size of quality changes is important to quantify the "true" level of cost
increases in the residential construction sector in order to obtain more reliable productivity
development figures. This paper shows that measured productivity in the residential construction
sector has been underestimated since 1990s. The findings imply that data collection for productivity
calculations should be more detailed and rigorous in order to measure quality changes. It highlights the
potential improvement that can be done in the calculations of productivity changes.

Keywords: productivity, construction, quality

JEL codes: L74, O33, O47, R31

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Introduction
The construction industry has been criticized for low productivity growth compared to traditional
manufacturing industry since the beginning of the 1990s. Investigations and research indicate that
many countries show weak or negative productivity growth (see e.g. Abdel-Wahab and Vogl, 2011;
National Research Council, 2009; Tran and Tookey, 2011). Figure 1 below, which is taken from a
report by the National Institute of Economic Research in Sweden, shows official productivity
development in the construction sector and it can be seen that there has been a clear productivity
increase in Sweden up to the mid-1990s, however the figure indicates that there has been no such trend
since that time.

Figure 1: Productivity development in the Swedish Construction sector (value added per hour worked) (Source: National
Institute of Economic Research, 2010).

With an overall acceptance of the presented lower productivity growth statistics, research and
investigations have concentrated on how to increase productivity by putting focus on e.g. enhanced
bundled contracts, more innovations, industrialized production methods, skill development and
collaborative construction projects (Egan, 1998; Abdel-Wahab et al, 2008; SOU 2002:115). Despite
all efforts to make changes in the construction sector with the aim of achieving increased productivity,
official statistics still show that productivity has been low or even negative the last decade. However
the reported low productivity growth has been questioned by both industry practitioners and
researchers (Bröchner & Olofsson, 2012; Goodrum et al, 2011). Several studies have in fact shown
that there might be measurement errors in the indexes that are used to calculate productivity in the
construction sector, which may lead to underestimation of productivity growth (see e.g. Allen, 1985;
Harrison, 2007; Huang et al, 2009).

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A recent study of potential measurement errors in the productivity figures for the Swedish construction
sector show that productivity growth probably is underestimated due to deficiencies in the index that is
used when the value added in current prices is converted into value added at constant prices (Lind and
Song, 2012). A central problem when deflating current prices is that the deflation should only take
away the pure price change and not price changes related to quality improvements. The actual quality
indicators used are however very crude and therefore the price index used fails to distinguish pure
price changes and price changes related to quality changes in a good way. Lind and Song (2012) show
that for housing construction only three quality properties are included in the data gathered to calculate
productivity, number of garage/parking lots that are built for the building, number of hygiene space
within each apartment and number of balconies. Other housing attributes that we usually consider to
affect quality, e.g. accessibility, interior design, building materials, and energy efficiency are not
included. This means that reported cost increases per unit can be overestimated as it does not take into
account quality improvements over time, and if this is the case productivity is underestimated as real
value added is underestimated.

Figure 2 below shows how the price ("cost") for the client has developed over time for building of new
houses. The price increase for housing construction has been roughly 2% more per year than the CPI
over the last 20 years, and these figures have been used a number of times in the public debate to
illustrate the productivity problems in the construction industry (for residential housing).

Figure 2: Development in the Swedish Construction Price Index for residential buildings 1968-2010 (Source: Statistics
Sweden, 2012). “Byggnadsprisindex” = Construction Price Index for residential buildings, “Konsumentprisindex” =
Consumer price index, “Flerfamiljshus” = Multifamily housing and “Gruppbyggda småhus” = Collectively built one- and
two-dwelling buildings.

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Aim and research question
The aim of this study is to estimate productivity figures that take into account quality changes in new
dwellings. Knowledge about the size of quality changes is important to quantify the "true" level of cost
increases in the housing construction sector in order to obtain more reliable productivity development
figures.

The structure of this paper is as follows. Section 2 clarifies the quality concept used and section 3
describes in detail the methods used. Section 4 and section 5 describe the results concerning quality
changes related to regulatory changes and quality increases from a consumer perspective, respectively.
Section 6 translates the quality changes to cost changes and then this is used to estimate the
measurement error in the productivity and cost figures presented above. Concluding comments can be
found in section 7.

Method
There are many definitions of quality in general and the different definitions might be appropriate
under different circumstances (Reeves and Bednar, 1994). Bröchner (2011) and Warsame (2011)
discuss the concept of quality for the construction sector. However, for the purpose of this study it is
not necessary to discuss what the ”best” definition of quality is. Rather, in this study quality changes
are interpreted as changes in characteristics of newly built dwelling, see Wu et al (2013). Using
different housing characteristics to capture housing quality is also in line with Kain and Quigley
(1970).

As mentioned above, Lind & Song (2012) found that very few characteristics (number of parking
lots/garages, number of hygiene space in apartments and number of balconies) are taken into account
when the Swedish Construction Price Index for residential buildings is calculated. They also put
forward a number of quality dimensions that are not included in the index but on the other hand have
been discussed concerning how to improve the measurement of productivity (see e.g. Bröchner, 2010).
Two of the new dimensions that this paper focuses on are mandatory quality changes related to
changes in the regulatory framework, and the customer perspective and their willingness to pay for
characteristics.

In order to measure the quality changes, that is changes in dwelling and property characteristics over
time for newly constructed dwellings, following steps have been utilized.

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Firstly, a study of the Swedish regulatory framework was performed to map regulatory changes during
the last two decades by comparing the mandatory building regulations from 1990 with the regulations
that was valid during 2010. Further, the observed changes have been compared with an investigation
of effects of regulations on costs done by the Swedish Association of Public Housing Companies
(SABO) in 2011, to validate the changes. These studies were followed by two semi-structured 1-hour
interviews and one 1-hour phone interview with construction managers both in the private as well as
the public sector for orientation of construction changes the last two decades in Sweden. The purpose
was also to get their opinion about the observed regulatory changes. The interviews were also one
input for the check-list for the field study described below.

Secondly, a number of quality variables, i.e. characteristics, that are related to residential buildings
were identified based primarily on Nathorst-Böös (1999) together with inputs from the interviews.
Altogether, 74 characteristic variables were identified. These variables are supposed to reflect
customer driven quality changes. In order to collect data regarding changes in these variables, we
made 31 on-site visits in connection to apartment sales in October-November 2012 with some
additional visits in March 2013. The choice of the 31 sales was based on when the buildings were built
in order to track changes in characteristics. For this study we chose buildings constructed during three
time periods, 1988-1991, 1999-2002 and 2009-2011. The customer oriented qualities will depend on
the submarket and the type of customer that the apartment is built for. The studied buildings and
apartments are all located in similar areas with respect to neighborhood and socio-economic factors.
The buildings in this study are located in suburbs in Stockholm municipality (Årsta, Hammarby
Sjöstad, Liljeholmen, Linhagensplan, Södermalm, and Enskede), except for one that belongs to Solna
Municipality (Haga). All studied apartments are condominiums with three rooms.

In the third step, we performed statistical tests to see if there have been any significant changes in the
quality of new productions over time measured as changes in a number of characteristics. In order to
limit the number of variables in the statistical analysis a step vise screening of the collected data was
made and in those cases where variations in the characteristics over time could be observed further
analysis were performed using Fischer’s exact test.

In the fourth step, based on the characteristics that exhibited statistically significant changes over time,
cost changes related to new construction were estimated. In order to find out the cost effect of higher
customer quality, e.g. characteristic changes, we sent out an enquiry to a small number of experienced
people from the housing construction industry. These experts gave answered the question how much it
would cost to produce a residential building today but with the quality the prevailed for new
construction in the early 1990s.

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In the final step estimation of the combined cost effects from both customer driven quality changes
and regulatory changes was undertaken. Based on size of the estimated cost changes that can be
attributed to the quality of the regulatory changes, new figures for the pure price inflation were
calculated. Based on the new estimated price inflation, better appraisals of the productivity changes in
the construction sector were calculated. That is the goal of the final step is to show that a better quality
adjusted construction price index can give a more correct picture of the true price evolution and there
for also for the productivity changes.

Results concerning regulatory changes

During the last 20 years the Swedish building regulation has changed, from detailed building
requirements to regulations with functional requirements in line with EU standards. The Swedish
regulations constitute minimum requirements of the output (Perbo, 2012). The case that a client
decides to build above the minimum requirement might result in elevated cost (Perbo, 2012).
However, such cost increases are not taken into account in this study. Besides changes in Swedish
building regulations that can drive cost, local requirements at municipality level can also increase
construction costs (see SOU 2012:86), but this study only focuses on the national building regulations.

Changes in regulatory framework might lead to quality increases in several ways, for instance through
better working environment for construction workers, better accessibility for people that live or visit
the buildings and other regulations that enhance the utility for both individuals as well as for the
society as a whole.

Already in the beginning of the 1990s there existed a large number of detailed regulatory
requirements. Over time new regulations have been added and some old regulations have been
changed or even taken away (even though some changes in some areas seem to be rather small). For
instance, stricter accessibility requirements (e.g. space for people confined to wheelchair) have led to
more spacious bathrooms and elevators but also accessibility to laundry and storage rooms. Although
changes in the accessibility roles do not explicitly regulate minimum sizes, SABO (2011) argues that
the changes in the rules between 1995 and 2011 have indirectly resulted in more spacious areas and
therefor higher total construction costs.

Increased regulatory demands of health, hygiene and living environment (e.g. noise and sound) have
resulted in higher standards of ventilating systems and isolations but have to some extent also affected
the structure of the actual building. These components are also related to stricter building regulations
concerning fire safety, which also include increased requirement for frameworks and cargos.
A development during the last decades is the increased environmental awareness. Even though it
started as far back as the energy crises in the 1970s, both in Sweden but also at an international level

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(Gellert et al, 2006; SABO, 2011), increased energy demands and higher energy efficiency
requirements have had an effect on the development of the regulatory framework since the 1990s.
Lower accepted levels of energy usage and U-values in single components are changes in the
regulations. These changes have resulted in e.g. thicker building frameworks (SABO, 2011) as well as
more advanced ventilation systems such as FTX system or heat recovering systems (Zalejska-Jonson
et al, 2012). The SABO (2011) investigation emphasizes that such new energy efficiency requirements
have had the strongest relative impact on construction costs increases.

It is not clear that changes in regulations concerning work environment for construction workers has
led to construction cost increases. It has indeed emerged during interviews with working environment
researchers that new rules, such as those that shall prevent heavy lifting, have only led to more
administration but not any direct cost increase.

Table 1: Areas that have been identified with changes in building regulations, both by the authors and SABO.
Areas with changes in the Author’s study of regulatory SABO (2011) study of the
regulatory framework framework 1990-2010 regulatory framework 1995-2010
Administration Yes Yes
Accessibility Yes Yes
Cargos, framework Yes -
Energy use Yes Yes
Fire protection Yes Yes
Health, hygiene, noise and sound Yes Yes
Work environment Yes Yes

Table 1 presents a summary of the identified areas of changes in building regulations. Both the authors
and SABO (2011) have identified same areas that have been subject to regulatory changes. Despite the
somewhat different period of study, the similarities between these two studies are striking and it is also
clear that not so much changed in the years of 1990 to 1995. Based on the identified regulatory
changes SABO (2011) has computed approximate cost increases that can referred to these changes.
According to SABO the building regulation changes between 1995 and 2011 have led to increases in
construction costs by approximately 1,500-1,750 SEK per square meter. These figures will be used
below when total cost increases related to quality changes are analyzed.

Statistical analysis of changes in quality

In this section based on observation of property characteristics (see above) we compare the quality (or
characteristics) in buildings constructed during three time periods, 1988-1991, 1999-2002 and 2009-
2011. Fisher’s Exact test is used in order to statistically verify whether there have been any quality
changes in new productions over the last two decades. The null hypothesis is that the proportion of
apartments that have specific characteristics is the same for all periods.

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The initial tests showed that there were no statistically significant differences in the characteristics in
buildings built around 2000 and 2010 but that there were statistically significant differences in

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Table 2: Results Fischer’s exact test.

Q 1990 Q 2000/2010 Q Total

Fisher's Significant or
Characteristic exact test not3 9 22 31
Canopy entrance 1 4 9 13
Built in front door 1 4 10 14
Playground 0,253 5 7 12
Windows in Stairwell 0,253 5 7 12
Stone floor covering on storey 0,077 * 4 18 22
Plastic floor covering on storey 0,077 * 5 4 9
Post box entrance 0 *; **; *** 0 22 22
Straight stairs in stairwell 0,456 3 11 14
Wide stairs in stairwell (>90 cm) 1 3 7 10
Windows in stairwell 0,433 5 8 13
Stone floor covering in stairwell 0,096 * 4 17 21
Plastic floor covering in stairwell 0,096 * 4 4 8
Big elevator 0 *; **; *** 0 22 22
Plastic floor in elevator 0,004 *; **; *** 5 1 6
Mirror in elevator 0,31 8 22 28
Communal laundry room 0,295 9 18 27
Closet 1,000 6 13 19
Extra toilet 0,537 0 3 3
Clinker flooring apt entrance 0,03 *; ** 0 10 10
Parquet flooring apt 0 *; **; *** 0 22 22
Floor heating bathroom 0 *; **; *** 0 18 18
Clinker flooring bathroom 0 *; **; *** 0 22 22
Fully tiled walls bathroom 0 *; **; *** 0 19 19
Washing machine 0 *; **; *** 0 21 21
Tumbler machine 0 *; **; *** 0 21 21
Combined washer/tumbler 1 0 1 1
Wall mounted WC 0 *; **; *** 0 16 16
Bath tube 0,001 *; **; *** 9 7 16
Windows in bathroom 0,642 1 4 6
Spotlights ceiling bathroom 0,058 * 0 7 7
Towel dryer bathroom 1 5 11 16
Built in micro oven 0,001 *; **; *** 0 15 15
Stove 0 *; **; *** 9 3 12
Ceramic hob 0,005 *; **;*** 0 12 12
Induction hob 0,077 * 0 7 7
High niche for kitchen application 0,032 *; ** 0 9 9
Dishwasher 0 *; **; *** 0 19 19
Kitchen application in stainless steel 0,001 *; **; *** 0 14 14
Big windows living room (<=70 cm a.f.) 0 *; **; *** 1 19 20
Big window bedroom (<=70 cm a.f.) 0 *; **; *** 0 16 16
Big windows kitchen (<=70 cm a.f.) 0,004 *; **; *** 0 13 13
Open plan living area kitchen/living
room 0 *; **; *** 2 20 22
3
Fischer’s Exact Test: *significant at 10% level; **significant at 5% level; ***significant at 1% level

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buildings built around 1990 and the newer buildings. Therefore the data set was divided into two time
periods, i.e. buildings built around 1990 and buildings built around 2000 and 2010. Fisher’s exact test
was performed for each characteristics based on these two time periods. The results are presented in
Table 2.

The statistical test shows that the buildings built in different time periods actually have a large number
of characteristics that have been changed over time. Table 3 presents a list of the characteristics for
which the null hypothesis can be rejected at 5 percent or lower significance level. In other words, each
of these characteristics is not independent of construction period (1990 or 2000/2010). These
characteristics will be used below where we analyze quality adjusted cost increases in residential
construction. (Ska vi kort beskriva några av de variabler som finns i tabellen?)

Table 3: Summary of the observed changes in costumer characteristics 1990-2000/2010

Location within the building Changes

Outside the apartment (except ventilation - Larger elevators (>=1000 kg)

system, space related to installations and other - Elevators with changed interior design, e.g. stone
systems for O&M) floor covering etc.
Inside apartment (general) - Clinker flooring apartment entrance
- Big windows in almost all rooms (<=70 cm a.f.)
- Parquet flooring in all rooms except bathroom
Bathroom - Floor heating
- Clinger flooring
- Fully tiled walls
- Washing and tumbler machines
- Wall mounted WC
- Shower enclosure instead of bathtub
Kitchen - Induction or glass-ceramic stove instead of
traditional stove
- Built in micro oven
- Cabinets for built-in appliances

Quantification of measurement error in productivity related quality changes

In the last section a number of the characteristics that seem to be not independent of building period
were identified. It was argued that the changes in characteristics between time periods could be related
to building regulations and customer related quality.

The next step is to quantify the size of the cost increase that can be referred to increases in quality.
Based on the calculations we will estimate how much lower the quality adjusted price increase would
have been and hence the size of the measurement error in the reported productivity changes

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Regulatory changes
According to the discussion above concerning cost increases due to regulatory changes including
energy efficiency improvement requirements have led to construction cost increases by approximately
1,750 SEK per square meter between 1995 and 2011. The average cost for new housing construction
in larger cities (excluding land cost) is today around 25,000 SEK per square meter and the figures
above imply that the cost would be 23,250 SEK per square meter without the new regulations.
Customer oriented qualities
In order to estimate cost changes that can be referred to changes in building characteristics we sent out
an enquiry to a small number of experienced people that are working with housing construction. In the
letter a list of the above identified building characteristics was presented (see table 3).

These experts were asked to answer the following question: “If the construction cost today is 25,000
SEK per square meter, how much would it cost to produce an apartment today without the new
characteristics.” They were given five different alternatives (see table 4) and they should pick the one
that best corresponds to construction cost without the new characteristics.

Table 4: Construction cost alternatives without new characteristics that the experts could choose between.
Alt 1 Alt 2 Alt 3 Alt 4 Alt 5
Construction cost 24,750 23,750 22,500 20,000 17,500
(SEK/sqm)
Percentage cost change -1% -5% -10% -20% -30%
(base 25,000)

Some of the experts chose the second alternative (23,750 SEK per square meter) while other chose the
third alternative (22,500 SEK per square meter). These alternatives correspond to 5% and 10% lower
construction cost. The experts were also given opportunity to write a comment and those who have
chosen to comment explained that a cost change of approximately 7 percent cost decrease would be
the most correct figure. Based on the answers we will use 23,000 SEK as the best estimate of how
much it will cost to produce a building without the new characteristics. In other words, the costs would
be 2,000 SEK per square meter lower (-8%) if the quality had stayed the same. (Ska vi skriva hur
många som svarat på de olika alternativen och ha med kommentarerna?)

Estimation of productivity measurement error

The analysis above show that it would cost 21.250 SEK per square meter compared to 25,000 SEK per
square meter. This means that the overall quality related cost increase is 3,750 SEK per square meter
(18%) over a 20-year period (1,750 due to regulatory changes plus 2,000 due to changes in
characteristics). This corresponds to a yearly average cost increase of about 0.8%. Thus the yearly

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changes in construction costs have been over estimated by about 0.8% since the cost calculations have
not taken quality changes into consideration.

The results imply that the productivity would have been 0.8% higher each year since the beginning of
the 1990s if quality changes had been controlled in a better way. As reported above the building price
index in Sweden increased by roughly 2% more per year than the Consumer Price Index (CPI),
however, he analysis above imply that the true difference should be 1.2% per year. In conclusion, 40%
of the reported difference between the building price index and CPI can be explained by measurement
error related to not taking quality changes into account.

Conclusions
Since the 1990s, construction practices have changed because of changes in both building regulations
and changes in customer preferences that result in changes in housing quality. However, current
estimation procedures for computing the building price index, do not in an adequate way take quality
changes into account which results in upward biases of price changes, and consequently causes
productivity changes to be to low due to overdeflation.

The aim of this study was to estimate productivity figures that take into account quality changes in
new dwellings. Knowledge about the size of quality changes is important to quantify the "true" level
of cost increases in the housing construction sector in order to obtain more reliable productivity
development figures. This study is based on an analysis of quality changes of new buildings related to
changes in building regulations and changes in building characteristics.

We argue that multi-family houses would be around 18 percent cheaper (about 0.8% per year) if they
were built in the same way as in the beginning of the 1990s. This implies that the yearly changes in
productivity have been underestimated by approximately 0.8% per year since 1990, because of
measurement errors due to lack of satisfactory quality adjustments.

There might of course be other differences over time that have acted as “cost-drivers” that could be
seen as quality changes in a bigger perspective. Since the beginning of the 21st century, more dwelling
areas have been located on land that was costly to get ready for new construction, such as Hammarby
Sjöstad and Norra Djurgårdsstaden, areas much resemble to the Dockland’s area in London. Cost for
decontaminations and other similar cost are not included in this study but are most likely something
that should be taken into account in the calculations of productivity to get a fair view of the
development of productivity in the construction sector.

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