Cities worldwide are booming as people migrate in search of better job opportunities and education. That creates strong demand for housing, and in many popular cities, demand for affordable housing has been unmet for many years, leading to rising housing costs.

According to a report by the McKinsey Global Institute, a third of urban dwellers, or 1.6 billion people, could face challenges in finding acceptable housing by 2025. As reported by Demographia, a US-based consulting group, Australia’s cities rank among the planet’s least-affordable cities when comparing median home prices with median income. Sydney ranks number two, after Hong Kong, with a multiple of 12.2. The median-priced Sydney home costs $1,077,000, while the median income is $88,000. Melbourne came in sixth with a multiple of 9.5. The median-priced home costs $740,000, and the median income is $78,000. Adelaide, Brisbane, and Perth also rank in the top 20.

Adding to the problem is the failure of the construction industry, on a macro level, to embrace innovation to increase productivity. According to Eric Baczuk, Designer-in-Residence at Sidewalk Labs, part of the Google/Alphabet ecosystem, “Innovation in residential construction has been slower than in other industrial sectors due to a combination of thin operating margins, boom-and-bust cycles in real estate and development, and ever-present fear of litigation.”

Lagging innovation results in stagnant productivity. The McKinsey report elaborates, saying, “While manufacturing and other industries have raised productivity steadily in the past few decades, in construction it has remained flat or gone down in many countries.”

That’s at least partly due to contractors maintaining antiquated practices. According to McKinsey, residential housing is largely built as it was five decades ago. That approach ignores several decades of advances in technology that could cut costs, speed production, and deliver a better product.

“Project costs could be reduced by about 30 percent and completion schedules shortened by about 40 percent if developers make use of value engineering (standardizing design) and industrial approaches, such as assembling buildings from prefabricated components manufactured offsite. Efficient procurement methods and other process improvements would help, as well,” the report’s authors state.

The Sidewalk Labs team offered their own assessment of possible improvements in housing construction that prefabricated components and standardised product catalogues could enable. “Our early estimates suggest that project costs could be reduced by over one-third, and completion schedules shortened by over half, if developers made use of standardization and industrial approaches to construction,” the authors state.

According to HomeAdvisor, the average new home in the US comes in at $290,489, or $150/ square foot for a 2000 square foot house. Prefab homes cost 10–15 per cent less on average, so a 2000 square foot prefab would cost $246,000–260,000.

Prefabrication, it seems, is the next big thing in housing. Indeed, Australia is at the forefront, having created the world’s first Modular Construction Code. According to Warren McGregor, CEO of prefabAUS, Australia’s peak industry body for off-site construction, “The Code aims to provide guidance to industry, government and the wider community on the design and construction of modular structures.”

Prefab’s potential advantages over site-built projects are manifold. Project costs can be lowered by locating factories in areas with lower labour costs. Weather-related delays can be minimised, cutting overall project time. Procurement can be more efficient with bulk buying, and less waste material goes in the bin. Neighbours experience less disruption at the project site, defects rectification is lower, and the “as built” project is closer to the “as designed” project.

In the commercial construction sector, where prefabrication is used more extensively than in the residential sector, more data is available that illustrates the advantages. According to Prefabrication and Modularization: Increasing Productivity in the Construction Industry from McGraw Hill, survey responses indicate that a majority of contractors, architects, and engineers believe that prefab construction generate better outcomes most of the time.

• Project schedules are improved, 66 per cent of respondents said. Schedules are improved by four weeks or more, 35 per cent of respondents said.
• Cost and budgets are improved, according to 65 per cent of respondents. An improvement of 6 per cent or more was indicated by 41 per cent of respondents.
• Site waste is reduced, 76 per cent of respondents said.
• Materials used are reduced, according to 62 per cent of respondents, and can be reduced by 5 per cent or more, 27 per cent of respondents said.

These advantages have not made much difference so far in the adoption of residential prefab construction, which stands at only about three per cent of projects worldwide. One serious impediment to increasing prefab adoption is balancing upfront capital investments with the high utilisation needed to justify those investments. Building a factory for prefab construction requires capital that a building contractor may not have, or have access to. The Sidewalk Labs team noted that “Investors must have confidence that sufficient, long-term demand exists in the market to see return on this capital — easier said than done in volatile housing markets.”

In addition, buyer financing is a sticking point. Lack of familiarity overall hurts the ability of buyers to obtain financing, as lenders simply don’t know how to evaluate prefab projects, and may not be familiar with the manufacturer in the way that they are with established stick-built home builders.

McGregor has also noted that prefab construction is sufficiently foreign to banks that their standard models don’t really apply. A bank’s standard contracts, for example, probably don’t apply when the elements of a project that are built off site are more than is typical.

Other disadvantages include the addition of transportation costs for large modules, and the need for a heavy-duty crane to move them into place.

Perhaps the new Modular Construction Code will give confidence to builders, lenders, and homebuyers that prefab construction is ready to go mainstream in Australia. According to McGregor, “the Code should help to demystify important aspects of designing and successful delivery of modular and offsite projects as well as providing a vital reference point not only for industry players but for client and funding organisations who also value the assurance that a robust and formalised Code can provide.”