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. 1. Introduction Housing is a commodity that occupies a large portion of household budgets in many developed countries and buying a single-family house or an apartment is the single most important investment a household does in life. Households in most of EU countries spend approximately one quarter of their income in housing expenses [1] while households in US spend one third of their income on housing [2]. Thus, housing provision is a central element in people’s living standards and welfare as well as a major part of capitalist economies [3]. In Sweden, and elsewhere, different types of housing subsidies and housing allowances have been used in order to enhance housing demand and/or construction of housing (see, e.g., [4]). Housing authority and other government agencies use construction price level as a tool to gauge appropriate policies toward the production level of affordable residential housing units. Our knowledge in determining house/apartment prices is rather good; however, our knowledge in estimating housing cost is deficient. Without superior knowledge of construction price and elasticity of supply of new housing construction, developers and contractors as well as public authorities could face a daunting challenge when trying
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