Supplying smarter: Learning to make housing supply more responsive

Since CMHC’s 2018 report on escalating house prices and in subsequent updates on our estimates of Canada’s housing supply gap, much has been said about the additional supply needed to restore housing affordability.

More recently, we examined how demand-side initiatives can harm affordability when they are not paired with sufficient supply. One rather unexplored area is the cost of not enabling our housing industry to become more agile — and how we can achieve this agility.

New modeling from CMHC, drawing on research by the Organisation for Economic Co-operation and Development, shows that if Canada’s housing industry had been as responsive as the American industry between 2006 and 2024, housing starts could have been 30% higher and house prices 10% lower (see figures 1 and 2). These scenarios were developed using CMHC’s Integrated Housing Model. We made housing supply more responsive by increasing the elasticity so it’s closer to what we see in the U.S.

This is especially telling, as the American residential construction industry has seen long-term declines in labour productivity — much like Canada’s — except during the pandemic. This raises an important question: What can Canada learn from the adaptability of U.S. housing supply?

What makes the American housing industry more agile than Canada’s?

Several factors explain why the American housing construction industry responds more quickly to changes in housing demand than Canada’s, with those listed below being the most significant. Some of these factors are within our control, while others are beyond our influence.

One factor beyond our control is the geographical landscape of cities. A professor at MIT found that cities with geographical constraints — such as mountains, coasts, major rivers and other significant water landmarks — tend to have less responsive residential construction industries than cities built on open plains with fewer regulatory constraints.

Most major Canadian cities face geographical constraints to development — think of the waterways and mountains in Vancouver or Montréal, which is built on an island. This may also help explain why cities in the Prairies, such as Edmonton, with their open landscapes have higher housing starts per capita than other major Canadian cities.

Another factor is demographic concentration. In countries with more high-density urban centres, workers can offset their cost of living — including housing costs — by accessing well-paid job opportunities in other cities.

For example, in the U.S., a worker in the finance, healthcare, tech or media industries in New York who can no longer afford housing in the city has options. They can move to cities like Chicago, Philadelphia, Dallas, Pittsburgh or Charlotte, which share similar industries with NYC. In Canada, someone working in Toronto might consider moving to Montréal or possibly Calgary, but Vancouver is often not an option due to its already high housing costs.

The lack of alternatives, due to Canada’s lower number of densified urban centres, makes households captive to a few cities. This dynamic also slows the construction industry’s response to changes in housing demand.

Finally, regulation plays a key role in how quickly the residential construction industry can react to changes in demand. Research in the U.S.found that land use and zoning regulations significantly affect the industry’s ability to respond to shifts in housing demand.

In Canada, similar patterns have been observed, with the housing industry’s responsiveness varying by city depending on housing and zoning regulations. CMHC’s research also found that more restrictive land use rules increase prices and reduce the number of new homes built each year. These challenges are most pronounced in Canada’s most expensive, high-demand markets, where lower rezoning approval rates make it harder to add new housing. Good news: regulations can be changed, offering opportunities to address these challenges.

Current regulatory and economic reforms setting the stage for improved housing outcomes over time

One striking finding of this analysis is that the benefits of a more responsive housing supply resulting from broader regulatory and economic reforms are not instantaneous — they take time to enable and materialize. But some of the reforms currently put in place across different orders of governments may bear the fruits of future housing outcomes improvements.

For example, the Housing Accelerator Fund, announced in 2023, provides funding to reduce red tape in Canadian municipalities and several cities across the country have already benefitted by reducing their regulatory burden on construction.

The federal government’s Build Canada Strong agenda, with elements that focus on infrastructure and housing development as well as economic development and integration. These initiatives offer an opportunity to start addressing the structural challenges in Canada, including low population density and limited urban industry diversification across cities.

While this is just the beginning of a journey, all these initiatives have the potential to compound over time to become enabling of an agile homebuilding industry. They also contribute to resituate housing outcomes where they belong — within their broader social and economic ecosystem.

Contributors to this article: Brahim Lgui.