At a time when Canada is in dire need of a massive increase in housing starts, a new study has revealed the sector responsible for delivering those homes is becoming less efficient.
The study, supported by the Canada Mortgage and Housing Corporation (CMHC), examined the evolution of labour productivity in residential construction and found there has been a long-term erosion in efficiency that may be contributing to reduced housing affordability and rising prices.
Authors of the study were CMHC deputy chief economist Aled ab Iorwerth, and Jenny Watt and Wulong Gu, economists with the economic, social analysis and modelling division of Statistics Canada.
Their research indicated labour productivity in the residential construction sector has declined by an average of 2.1 per cent per year over the last two decades, although it increased in the overall business sector over the same period by 12.5 per cent, or 0.5 per cent per year, underscoring a widening performance gap in one of Canada’s most critical industries.
Labour productivity growth in Canada’s residential construction sector, measured as real gross output per worker, declined by a cumulative 37.3 per cent between 2001 and 2023.
The timing could hardly be worse. Canada is expected to require a massive increase in housing starts to restore affordability by 2035.
The study’s authors suggest this productivity slump may already be contributing to rising home prices and worsening affordability.
At its core, labour productivity measures how much output is generated per worker. In residential construction, the decline reflects a troubling dynamic. The result is that each worker, on average, is producing less than in previous decades.
Much of the decline can be traced to the industry’s structure. Residential construction in Canada is dominated by small firms and the study finds these businesses – particularly those with fewer than 20 employees – account for the majority of the productivity drop.
Firms with fewer than five employees alone contributed more than 22 percentage points to the overall decline, while those with five to 19 employees added another 16 points.
In contrast, larger firms with more than 50 employees were the only group to make a positive contribution to productivity over the period.
Even so, the study cautions against viewing consolidation as a silver bullet. While larger firms tend to be slightly more productive, the advantage is modest – roughly a 10-per-cent gap compared to the smallest firms, and even less between other size categories.
As a result, the gradual shift toward larger firms has done little to offset the broader decline. Between 2001 and 2023, the share of employment in small firms fell from nearly 80 per cent to about 66 per cent, but this reallocation boosted overall productivity by less than five per cent.
“Consolidation will not be sufficient to solve Canada’s labour productivity woes,” the authors conclude.
The findings also reveal significant regional disparities. Productivity declined in most parts of the country, but the extent of the drop varied widely. Ontario stands out as a major driver of the national trend, accounting for more than half of the total decline.
In Ontario, productivity fell across all firm sizes, making it the only province where no segment of the industry showed improvement. This suggests the problem is not limited to small operators but reflects broader structural or policy-related challenges.
By contrast, a few provinces – including Prince Edward Island, Nova Scotia and New Brunswick – managed to achieve modest productivity gains. British Columbia also made a positive contribution at the national level, though largely due to an increased share of construction activity rather than improvements within firms.
The study points to several possible explanations for the sector’s weak productivity performance. These include chronic shortages of skilled tradespeople, rising material costs, regulatory complexity and limited adoption of new technologies.
The construction industry is also highly fragmented, with a constant churn of firms entering and exiting the market.
While such turnover can sometimes drive innovation, high exit rates may also signal a difficult and unstable business environment.
Globally, the authors state, Canada is not alone in facing these challenges. Similar productivity slowdowns have been observed in residential construction sectors across the United States, Europe and Australia. However, the Canadian context is particularly concerning given the scale of the country’s housing shortfall.
The federal government has already signalled its concern by creating a new agency, Build Canada Homes, aimed in part at boosting productivity and increasing housing supply. But the study suggests reversing decades of decline will require more than structural changes to firm size.
Instead, a broader transformation may be needed, the authors state, one that addresses labour shortages, encourages innovation, streamlines regulation and improves project management practices.
Without meaningful gains in productivity, simply adding more workers may not be enough to meet Canada’s housing targets. In fact, the study suggests increasing employment without corresponding output gains could further exacerbate inefficiencies.
