Framework for change: Productivity in housing construction

Introduction

Housing affordability is challenging Canadians. To address this, CMHC has shown that we need to double housing starts over the next decade. Meeting this goal will require building smarter and faster, with governments and business working together. While governments can improve regulations, the residential construction industry will need to invest to improve its productivity. What are the current productivity challenges in building housing in Canada, and what solutions show the most promise?

Productivity measures how much output, such as housing, is produced for each hour of work. Increasing productivity isn’t about working more hours—it’s about working smarter. This means investing in the latest tools and equipment, ensuring workers have top-notch skills. It also involves using innovative and effective management techniques and reorganizing businesses to take advantage of these improvements.

The productivity performance of the residential construction industry has been much weaker since the pandemic, contributing to the loss of housing affordability. The Centre for the Study of Living Standards estimates that lost productivity from 2019 to 2024 added $6 to $8 billion to housing construction costs in Canada. This accounts for up to 20% of the increase in new home prices. Boosting productivity in residential construction would also strengthen Canada’s overall economic performance. In 2024, residential construction accounted for 4.2% of business-sector employment but only 3.3% of business-sector value added.

In practice, industry performance and government policies are intertwined. The latest US research shows that inefficient policies make businesses less willing to invest in productivity enhancements, such as new skills and better technology.

Improving productivity in residential construction will require an effective policy framework, and many countries are doing this. The vision is clear: improve productivity and increase housing supply to improve housing affordability.

Governments can play a key role by encouraging and incentivizing investment in skills and equipment and the adoption of technologies by the industry. They can also demonstrate the opportunities of new technologies through pilot projects. For example, CMHC did this through the Demonstrations Initiative and the Housing Supply Challenge.

By showing that increasing housing supply is a long-term priority for the government, governments can build industry confidence and encourage investment.

Productivity in Canada’s residential construction industry has been weak since the pandemic

In Canada, and many other countries, productivity in residential construction has been weak. This challenge has worsened since the pandemic. While the industry’s productivity growth was relatively strong in the decade before the pandemic, it subsequently collapsed as shown in Table 1. The number of jobs and total hours worked grew more than output.

Source: CSLS calculations based on Statistics Canada data

Canada’s economy has long struggled with poor productivity performance compared to peer countries, which the residential construction industry reflects. Some recent challenges in residential construction are beyond the industry’s control. Macroeconomic instability from inflation and higher interest rates, combined with a stretched post-pandemic supply chain, has made planning future investments difficult and risky. Rising material costs have added to these challenges.

Given the importance of maintaining a skilled workforce in the industry, we often hear that reducing its size is the very last option. This approach helps reduce the risk of workers permanently losing their skills during periods of low demand. However, this “labour hoarding” lowers productivity because less output is produced with the same amount of work. Keeping workers employed over the business cycle is challenging when demand for the industry’s output is so volatile. This volatility discourages long-term investment, so reestablishing stable long-term economic growth is critical.

Characteristics of the industry also negatively affect productivity. With house prices rising so significantly over the past few decades, and particularly since the pandemic, the need to reduce construction costs may not be clear. Since construction costs are not seen as the main driver of house prices, architects and builders have little incentive to reduce them. Given the challenge of housing affordability, however, we need an “all-hands-on-deck” approach where everyone works to lower housing costs.

We often hear that builders resist changing tried-and-tested methods. New technologies are expensive, and innovation is risky. Box 1 looks at how Japan is experimenting with robots to address labour shortages in construction.

Uncertainty over future demand makes it challenging for the industry to invest, especially when the benefits of those investments are uncertain.

Because the industry is also very localized across cities and provinces, there is limited opportunity to reap benefits of risky investment across a wider market. Different regulations across jurisdictions for prefabricated housing limit the industry’s potential to achieve economies of scale.

What might be an effective policy framework to boost productivity in residential construction?

To promote productivity growth, governments can implement framework policies to encourage business investment, innovation and experimentation. Key elements of an effective policy framework include:

• Encouraging long-term investment in innovation and better equipment
• Co-investing to share risks of research and development
• Reviewing regulations to reform those that lower productivity
• Developing and training workers with appropriate skills
• Sharing best practices and information on effective work processes
• Broadening data standards to enable better cooperation, coordination and planning
• Building incentives into programs to experiment and innovate
• Improving transparency and predictability on housing needed

Countries around the world are increasingly recognizing the importance of improving construction productivity. Many are developing policy frameworks to help construction firms invest in technology and to improve their business practices. The European Commission, for example, has started on this path through its Transition Pathway for Construction.

Individual governments are also modernizing residential construction through targeted policies that improve speed, reduce costs and encourage innovation.

Further afield, Singapore has adopted a suite of policies to enhance construction productivity:

• Construction Transformation Project (CTP): Pilots prefab and automation in public housing.
• Productivity Innovation Project (PIP): Offers up to 70% co-funding for housing projects that boost on-site productivity.
• Building Innovation Panel (BIP): Fast-tracks approval of new housing systems.

In Canada, governments can lead the way by requiring the adoption of modern data standards and planning tools, such as Building Information Modelling (BIM). Leading countries, such as Singapore and the UK, are already mandating digital standards for social housing construction (see Box 2).

Increased transparency and certainty in planning would encourage the industry to plan for the long term. CMHC’s analysis of housing regulations suggests that approval delays harm affordability, and the way this could happen is by inhibiting productivity.

In the same vein, governments should digitize their data and processes to create uniform data systems that allow easier management for permit systems. Standardized data on land availability, zoning and pricing, approval systems and benchmarks for costs would help decision making.

Standardized regulations and consistent implementation, through a nationally consistent building code for example, would reduce complexity. A fragmented approach increases building costs by limiting economies of scale. Using comprehensive cost-benefit analyses of regulations more widely could help reduce their burden.

Through its research, CMHC has highlighted how much supply needs to be built. Providing the industry with confidence in future demand will encourage the mass production of housing. In Budget 2025, the government committed to supercharging home building across the country. This encourages the adoption of new technologies that improve productivity.

Developing a national perspective on population projections—using more scenario analysis and greater understanding of population flows across the country—would enable greater collaboration on what needs to be built. The approach is similar to Austria’s federal system of government, which holds meetings to coordinate spatial development at the national level.

Governments can demonstrate the technological and financial feasibility of new approaches by taking on the risks of demonstrating which ideas work. CMHC has been active in this area through initiatives like the Housing Supply Challenge.

Working together to increase housing supply and improve affordability

CMHC has consistently emphasized the importance of increasing housing supply to address affordability. Achieving this goal requires all hands-on-deck by both governments and the private sector. By establishing a long-term policy framework, governments will lay the groundwork for more business investment to improve productivity in residential construction. This will help increase housing supply and contribute to improved housing affordability for everyone.