The question of the title always comes up from time to time when talking about the price of housing. Why do new apartments clearly cost more than old apartments? In the current year, the price difference in euros has been on average just under 1 euros / m² (Figure 500). The price difference has grown in favor of new apartments in recent years.
Figure 1. Prices of new and old apartment buildings.
At least three reasons can be found for the phenomenon. First of all, old and new apartments have different characteristics. For example, exchanging an old used car for a new one in a car shop usually always requires a down payment. You rarely get something newer for the same money. New apartments are in a completely different category in terms of technical features and living comfort than, say, those built in the 60s. For example, the advantage of new apartments can also be the cost savings during use that arise with the improvement of energy efficiency.
Secondly, in recent years, city centers have been rebuilt in Finland. As a result, new apartments have been created in areas where the price of land is higher than in the outskirts of the city due to better accessibility. When centers are built in several cities at the same time, the new apartments are located on average in more expensive areas than the old housing stock. It must be said that new apartments must be built in city centers, where there is the most demand and which also enables a more compact urban structure. Demand is also supported by the aging of the population. The aging population seeks services and smaller, but accessible apartments.
Thirdly, the costs of building new apartments compared to old ones are increased by increased regulations, norms and design requirements. The strict standards governing today's construction were not all valid in previous decades, when the cost burden of construction was lighter. The tightening of indirect taxation has also increased the price of new production in recent years. According to a report made by VTT in 2014, the share of taxes and tax-related payments in the price of a new apartment rises to more than 40 percent.
The price difference between new and old apartments will therefore remain in the future. The price level of new apartments can be brought down, for example, by dismantling construction standards. However, the housing market is a whole that consists of free-financed and subsidized owner-occupied and rented apartments or their intermediate forms. When the demand exceeds the supply, the best and only way to respond to the high cost of housing is to increase the supply, i.e. build more. The demand for housing services will continue to grow in large urban areas with population growth and urbanization. Therefore, the flexibility of the land policy and zoning processes of the growth centers are in a special position in curbing the rise in housing costs.
How many more apartments should be built in order to keep the price of housing under control? And above all, where should the new apartments be built? Among other things, the answer to these questions can be found in the Housing Need for Housing 2040 study being done at VTT, which will be published on January 19.
Sami Pakarinen
Chief Economist
Confederation of Finnish Construction Industries (CFCI)
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