Canadian small construction companies’ struggles are is hampering efforts to improve housing affordability, according to a new study by Statistics Canada.

The study found that labour productivity in residential construction fell 37.3% between 2001 and 2023 as employment in the sector rose sharply while output increased at a much slower pace. Statistics Canada said smaller firms accounted for the overall decline in labour productivity.

Increasing construction efficiency “is the long term key to improving housing affordability,” Aled ab Iorwerth, a Canada Mortgage and Housing Corporation deputy chief economist at Canada Mortgage and Housing Corporation who co-authored the study, said in an interview with CTV.

“It’s not going to be a quick process,” ab Iorwerth told his interviewer. “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.”

The study noted that Canada’s construction industry has lagged other sectors in productivity growth for two decades and suggested the slowdown “may have contributed to reduced housing affordability and rising prices.”

“It is estimated that Canada requires a massive increase in housing starts to meet demand and improve affordability by 2035,” based on CMHC data, the study found.

Between 2001 and 2023, the sector added workers at an “especially large” rate, but output did not keep pace, resulting in the productivity drop. Productivity was measured by dividing real gross revenue by annual average employment.

Small companies — defined as those with fewer than 20 employees — were the primary drivers of the decline, according to the study. Firms with fewer than five employees contributed 22.4 percentage points to the overall drop, while those with five to 19 employees accounted for another 16.1 points.

“Small firms are very unproductive,” ab Iorwerth told CTV, adding that large firms are not much better.

He suggested that small builders often focus on single-detached homes that are relatively easy to build but deploy construction methods with little innovation. The deputy economist called on companies to use the latest technologies, utilize materials more effectively and hire more skilled workers.

He cited such countries as Singapore, which requires more efficient processes for some government-led projects and Japan, where builders are using robotics more often.

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

Provincially, Ontario accounted for 24.7 percentage points of the 37.3% productivity decline, according to the study. British Columbia was the only province to contribute positively to productivity growth, largely because its share of national construction employment increased significantly.

A decline in labour productivity across Ontario, Alberta and Quebec was largely driven by firms with fewer than 20 employees. Ontario was the only province to see productivity fall across all company sizes.

“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 told CTV.

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

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