The housing sector needs a renovation

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Canada needs a lot more housing – but the construction industry is a sinkhole of stagnant productivity. Devoting more resources to new homes could worsen the country’s already-bleak economic performance.

Over the past three years, 2021 through 2023, there were more than 773,000 housing starts, the most of any three-year period on record. But the number is a lot less impressive than it could be. The last similar building boom was a half-century ago. Housing starts hit about 750,000 during three years in the early 1970s and again later in the decade.

Comparing present and past shows how much modern construction has fallen short. On a per-capita basis, housing starts were roughly two-thirds higher at peaks in the 1970s compared with the past three years. The process today, from planning to building, is far slower. An absence of productivity gains holds back housing and the broader economy.

Stagnant construction productivity has become common in many countries, from building homes to building anything. A report last week from Toronto-Dominion Bank showed construction productivity in Canada hasn’t improved at all over four decades, after a decline in the past several years. But the United States hasn’t fared any better.

For Canada, there’s a twofold importance in improving construction productivity. First, TD observed that the sector is the main reason that the country’s overall productivity is anemic. Second, with the pressing need to build more homes, to alleviate prices to buy and rent, the country needs to get a better return on resources invested in housing. Pouring a lot more money into an underperforming sector of the economy is bad news for Canada’s economic future.

In May, a Canada Mortgage and Housing Corp. report estimated that the country should be able to reach more than 400,000 annual housing starts. One issue is insufficient scale among residential builders, in part because of provincial trade barriers. The bulk of companies have fewer than five workers. This leads to a general lack of efficiency.

Another factor, noted in a McKinsey article in August, is “the industry’s tendency to offer bespoke solutions.” Treating each project as unique slows the overall production of new homes. A report in March from CMHC said that housing relies on “a complex production chain” that is fraught with numerous steps and potential delays – all of it dragging down potential productivity.

Then there are the many things before construction even happens, from zoning and permits to development taxes on new homes. This is where governments could make a real difference. Some have started to move aggressively to liberalize zoning, such as British Columbia, and Alberta has experienced a spike in housing starts, sped along by the relative ease with which new homes are approved in the province.

But other governments are reluctant. In Ontario Premier Doug Ford this year rejected proposals to require cities to allow more housing density around transit and in general.

One recent study suggested increased density in Toronto could open up space for millions of new homes. But Mr. Ford last week said he “doesn’t want to dictate” such details to cities – yet it is city councils that have failed. Policy matters. According to CMHC, housing starts in Calgary last year were 11.7 per 1,000 people and Vancouver was 11.3 per 1,000. Toronto was far behind, at 6.9 per 1,000. CMHC said that if cities such as Toronto could rival results in Vancouver and Calgary, the national construction productivity picture would be much improved.

B.C.’s decision to legislate higher levels of density across the province is the model to follow. It should help improve construction productivity, by making the planning process for new homes clearer and less reliant on capricious decisions by city councils that too often lean against new housing. Similar reforms in New Zealand helped spur more productive construction, according to a report last week from economists at the B.C. Real Estate Association. Construction companies were able to draw more workers and invested more in their businesses as well. The economists emphasized the importance of “efficiency and innovation gains along the entire construction process.”

Building homes doesn’t need to be as complicated as it has become. Governments have started to simplify parts of the process. The construction industry must improve its operations. Successfully building many new homes – and reviving Canada’s lacklustre productivity – depends on it.