Canada’s lagging construction industry linked to housing affordability issues: StatCan

CMHC Deputy Chief Economist Aled ab Iorwerth discusses a study he co-authored that analyzes ways Canada can improve housing affordability.

A new study from Statistics Canada linked a lagging construction industry and small businesses to housing affordability issues across the country.

In a study released Wednesday, Statistics Canada (StatCan) found that construction companies have been decreasing in productivity nationwide, and “smaller firms accounted for the overall decline in labour productivity.”

Increasing the efficiency of construction, “is the long term key to improving housing affordability,” said Aled ab Iorwerth, Canada Mortgage Housing Corporation (CMHC) deputy chief economist and a co-author of the report, in a Wednesday interview with CTVNews.ca.

“It’s not going to be a quick process,” said ab Iorwerth. “It’s going to take years of consistent building of more housing. Now, it’s not just that we’re building more housing, but we need to get those housing built at a reasonable cost.”

Al Iorwerth also said that companies need to “deploy the latest technologies … use materials in a better way,” and hire better skilled workers.

“The scale of the challenge we’re facing is enormous, particularly in our large cities,” he added.

‘Massive increase’ in housing starts needed

“It is estimated that Canada requires a massive increase in housing starts to meet demand and improve affordability by 2035,” the study said, citing the CMHC. StatCan added that Canada’s construction industry has been lagging behind other sectors in productivity growth for 20 years.

The study suggested that the slow growth in construction “may have contributed to reduced housing affordability and rising prices.”

“One way of trying to fix the issue, maybe to try and improve productivity, (is) trying to build more housing at lower costs,” ab Iorwerth said in an interview.

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The study measures labour productivity through dividing real gross revenue by annual average employment. In other words, productivity equals output divided by number of employees. Between 2001 and 2023, labour productivity in housing construction dropped by 37.3 per cent. The study found construction jobs rose at an “especially large” rate, while output increased at a much slower rate, leading to the drop in productivity.

“What we’re really trying to understand is can we build a lot more housing, but (how) to do that at a lower cost,” ab Iorwerth said.

Other countries have seen similar declines and StatCan highlighted the U.S., Australia, as well as countries in Europe and Asia. Ab Iorwerth pointed to Singapore and Japan as potential examples to follow. Singapore mandates more efficient processes be used in bids for some government projects, while Japan’s construction industry is beginning to use robots in its construction, ab Iorwerth said.

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Small businesses driving down production

Small construction companies drove down productivity more than larger ones, with small companies bringing the industry down 38.5 percentage points, according to the study.

“Small firms are very unproductive,” but ab Iorwerth said, “the large firms are not really (much) better.” One explanation he suggested was small firms focusing on building single detached homes which he said are “relatively easy to build, they are built in a standard way.” However, he said the standard way could benefit from new tech and processes.

“There hasn’t been a lot of innovation in building single detached housing, its built now the same way it was 100 years ago.”

StatCan defines small companies as having less than 20 employees. Firms with fewer than five employees contributed 22.4 points to the overall 37.3 per cent decline, while those with between five and 19 employees brought it down by another 16.1 percentage points. The smallest firms, who employ less than five people, are the least productive the study found.

Although large companies positively affected productivity, “the relative productivity advantage of larger firms is small in the residential construction industry,” StatCan said.

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“You need the cranes, you need the elevators, and so forth,” to build larger residential projects like apartments and condos, ab Iorwerth said, explaining why the larger firms are struggling with productivity.

“But again, my issue there is that there may be some technologies that allow better construction to take place. I think what this really underscores is the scope for improvement across the board.”

Generally, larger businesses are expected to be more productive than small ones. As production becomes more efficient, each individual unit of output becomes less expensive, creating a proportionate advantage.

Nationwide slowdown but some slower than others

Ontario contributed the lion’s share to the productivity decline, accounting for 24.7f out of the 37.3 per cent drop. British Columbia contributed positively to productivity, the only province to do so, “but this is only through the between effect, with the labour share of the province increasing substantially, from 12.9 per cent of jobs to 19.2 per cent of jobs,” StatCan said.

A decline in labour productivity across Ontario, Alberta, and Quebec, was largely caused by companies with fewer than 20 employees.

“I think what is happening in the industry is that demand for housing is increasing and that supply is just being met by hiring more and more workers,” ab Iorwerth said.

His concern was that companies were not improving their processes and were instead just buying more labour. Instead, he suggested they look to new processes, new technologies, robots, prefabs, economy of scale, or other more efficient methods to make each worker more productive.

“(Companies) would be a lot more incentivized if the whole cost were lower and if the builders were able to build these housing, these units at much lower cost,” he said.

Small construction businesses declined across these provinces, “as employment shifted toward larger and more productive firms with 20 or more employees,” StatCan said.

Ontario was the sole province to have labour productivity decreased across all company sizes.