This article originally appeared in National Newswatch.
By Daniel Dorman, September 10, 2024
Last month the Globe and Mail reported that real estate insolvencies are set to surpass levels seen during the global financial crisis. A TD Economics report on housing came out earlier this year with the sobering title, “Federal Housing Plan: Ambition and Reality” — and downright pessimistic subtitles like “Demand measures unlikely to be game changers” paired with “Supply policies to face headwinds.”
The problem is only getting worse, but there is, as Mathieu Laberge from the Canadian Mortgage and Housing Corporation (CMHC) puts it, an elephant in the room: The residential construction industry is inefficient. Policies aimed at solving the housing crisis will continue to fail until policymakers address this root problem.
When I worked on construction crews during the summers of my university years, I often heard the complaint, “these kids just don’t want to work.” Thankfully, and you’ll have to take my word for it, these comments weren’t directed at me, but I always wondered if there was some truth behind the grumbling and if construction crews were actually less productive than they used to be.
While I don’t know whether the ‘kids’ are specifically to blame, an increasingly unproductive construction industry appears to be a core part of why we’re failing to increase housing supply in Canada.
Labour productivity in the sector is declining. While this may sound simply like more bad news, it at least indicates where one significant cause of our malaise lies and outlines why other policy measures, which ignore this foundational problem with our incapacity to increase supply, are likely destined to fail.
Laberge explains that if Canada achieved even average labour productivity in the residential construction sector in 2023 we would have had 377,000 housing starts. We actually had just 240,000 housing starts, meaning that (despite all the government effort and spending) we were 57 percent less productive than Canada’s average over the last 25 years. Based on our approximately 650,000 strong residential construction labour force, we should be building an additional 130,000 to 225,000 homes per year without adding a single worker!
The fixes laid out in Canada’s Housing Plan are currently too piecemeal and vaguely drawn to address the construction industry’s substantial productivity problem. Some policies in the plan such as “Introducing a standardised housing design catalogue,” or “providing low-cost loans to prefabricated housing projects” appear somewhat helpful (particularly as they emphasise the possibilities of modular construction), but do little to address why we were building a fraction of the homes we should be based on our current labour force.
Thankfully, Laberge also hints at the cause of this inefficiency: “Across Canada, nearly 69% of construction businesses have less than 5 employees. Surprisingly, only 1 company in Canada has more than 500 employees, in a country of over 40 million people! Consolidation may help generate economies of scale…” Or as CMHC deputy chief economist Kevin Hughes explains, “low market consolidation hinders investment in R&D and efficient recruitment, training, resource allocation and project management.”
Canadian construction companies are plainly struggling to grow and create the economies of scale that would allow both for greater efficiency practically and a coordinated industry push back against regulatory barriers. It is apparent that, compared to other consolidated industries that can object when regulation significantly hampers their business, a fragmented residential construction industry–consisting primarily of companies with five employees or less–won’t have the broad outlook or resources to engage in such advocacy.
It also seems possible that, in the same way other industries are struggling under Canada’s comparatively uncompetitive corporate tax rates and regulatory burden, construction companies are simply finding Canada an unfriendly place to do business.
If the federal government is to get more significantly involved in the housing sector, it should not develop a sweeping “Canadian industrial strategy for homebuilding”, as is promised in the Feds housing plan. It should, however, continue to think about how to pressure lagging municipalities to remove regulatory barriers. And, if the federal government is going to bend to political pressure and meddle directly in the sector, it could consider offering further industry specific tax cuts or even providing a tax credit for companies that can demonstrate higher than average housing completions per worker (something mimicking a productivity bonus in the private sector).
The bottom line is we need more houses, fast, and we won’t get there without a more productive construction industry.
Daniel Dorman is a contributor to Young Voices and the Managing Editor and Director of Operations at the Macdonald-Laurier Institute
