Economists often underline the traditional areas where productivity gains can be achieved. When it comes to housing, industry experts will add that these are not limited to the construction phase of supply.
In this first of a series dedicated to productivity, we’ll start by looking at the more general and well-known productivity issues and then get a feel for the more specific issues relating to the housing supply chain. With these general and specific focuses, we can then identify areas where productivity gains are more likely to be achieved.
Productivity growth: going beyond basic economics
When considering a basic economics model, producing more with the same inputs (or producing as much with less) increases value added and income. This, in turn, can benefit firms through higher profits and dividends, workers through higher wages, government through higher tax revenue, and customers through lower prices.
That said, how and when these benefits get distributed is a much more complicated matter. This “distributional complexity” must be carefully examined and understood when identifying potential productivity gains. This is why an expert level of industry-specific knowledge is critical and cannot be substituted with a basic economics approach.
Labour force productivity: a fundamental and widespread issue
Today in Canada, labour productivity is limited by the retirement of baby boomers and widespread shortages of specialized labour. There is hardly a region in the country that is not impacted by one of these factors.
The retirement of the baby-boomer cohort from the labour force is a major concern. In the construction sector, approximately 25% of those currently employed is expected to retire in the next 10 years.
Meanwhile, labour shortages have led to decreased enrollment in trades training programs. For the residential construction sector, which depends on a broad set of skilled labour, this is a major barrier.
And while increased immigration will contribute to addressing this, the timing and extent of its impact remain uncertain. We’ll dive into this topic in an upcoming article.
Housing has specific productivity challenges
There are several specific features of housing that pose real challenges to achieving productivity gains. These mainly relate to both the nature of housing itself and to its specific production process. Houses and even apartment buildings differ widely according to numerous features. This takes away the advantages of mass production.
Moreover, apart from exceptional cases, housing is still not factory produced but rather relies on a complex production chain. This chain depends on many steps and potential delays that are not entirely under the builder’s control.
When comparing residential construction to the much more productive mining sector for example, many differences are apparent. Mining firms tend to be large and have access to substantial amounts of capital, enabling activities such as research & development and the hiring of a highly skilled technical and managerial workforce.
They also profit from economies of scale and in periods of high demand and can take advantage of international markets. In addition, production takes place in a much more confined area permitting continuous, around the clock, extraction.
The impact of these and other features are apparent in statistics such as labour productivity (the ratio between real value added and hours worked). Indeed, we see that the ratio for the oil & gas extraction sector is close to 700, when compared to that of residential construction, which stands at fifty.
While there are some paths that the housing sector can follow, such as a more consolidated industry, other paths are much less obvious if not impossible.
Canada’s fragmented residential construction industry structure
While consolidation has occurred in most North American industries over the last century, the residential construction sector remains exceptional in being more fragmented. If one defines a consolidated sector as being composed of one to five major players, Canada’s residential construction sector is not.
This is more apparent in some regions of the country and, not surprisingly, in the single-detached market segments, where some firms will build one house a year. As discussed above, low market consolidation hinders investment in R&D and efficient recruitment, training, resource allocation and project management.
A recent study commissioned by the Association de la construction du Québec showed that increased productivity in the residential construction sector was attributable to the higher share of multi-residential buildings (100 units and over) built by firms. Given the recent surge in technologies such as AI, blockchain contracts, 3D modeling and building automation, it is reasonable to believe that larger firms are more able to optimize these.
While continued and increased urban densification will possibly lead to a higher degree of consolidation, the industry in smaller urban agglomerations and rural areas is likely to remain fragmented.
Supply productivity: accounting for more than construction
“Supplying” a dwelling, especially an apartment building, involves the completion of several critical phases before workers arrive on site. Among the more critical steps are those of concept design, feasibility studies, acquisition of financing, land and building permits, and quality control protocols.
When considering the entire process in terms of productivity, it is more accurate to speak of “supply” productivity.
In an upcoming article, we’ll examine some of the above-mentioned phases and identify where productivity gaps can be closed.
The public sector has specific levers it can use
When considering productivity, there are several areas where the public sector (national, provincial, and municipal) can play a role. These include traditional levers such as direct investment, fiscal incentives, and targeted policies (aimed at specific domains such as higher education and R&D). Still at the national level, governments can be involved, directly and indirectly, in the fostering of venture capital.
More regional and local levels of government have an equally important role to play in addressing the specific realities they better understand and are more empowered to deal with. On this list are issues such as those related to the labour code and regulatory environment.
Take for example the City of Kelowna. Since last year, Kelowna staff have been working in partnership with Microsoft on developing an AI chatbot that can receive applications for construction and renovations, analyze them for compliance, and issue permits.
Time for bold action
When considering productivity as a remedy to the housing crisis, we must consider the general issues common to all industries but also those specific to housing supply. From this introductory article, we find that housing supply faces both general and industry specific productivity challenges. When considering the entire housing supply chain, these encompass more than the construction phase.
In this context, it is imperative that measures aimed at increasing productivity of housing supply be carefully tailored to both industry and market specific realities.
The COVID-19 pandemic was a period that saw urgent, intense, innovative, and wide-ranging mobilization, the likes of which was unseen since World War II. This included unprecedented breakthroughs in pharmaceutical productivity, previously thought to be impossible. This very difficult moment taught us that despite a great obstacle there was a way.
We can expect limited results in the absence of a consensus that the housing crisis is of capital importance and that bold and concerted action is required by the private and public sectors.
Done!
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