What is Canada’s potential capacity for housing construction?

Since the launch of Canada’s Housing Plan, and the subsequent 2024 Federal Budget, several analysts have questioned the country’s capacity to build 3.87 million new homes by 2031.

While labour shortages remain a barrier to increasing supply, roughly 650,000 workers were building homes in Canada in 2023. This is the most we’ve ever seen! Yet construction activity didn’t keep pace with the growth in dedicated resources.

With the current resources, we should be building between 130,000 and 225,000 more homes each year. This equates to an annual pace of more than 400,000 starts per year.

Reaching this full potential will require structural changes that go far beyond the short term. There are adjustments occurring across the country right now that may help get us closer to this goal, such as changes to regulations at the municipal level. That said, more can and must be done by governments and the industry to achieve greater housing outcomes.

Housing starts aren’t keeping pace with current residential construction resources

Until the mid-2000s, housing starts were closely aligned with employment and gross domestic product (GDP) in residential construction shown in Figure 1. In the following years, despite increased investment in residential construction through both funding and labour, the pace of construction did not keep up.

What’s the full potential for housing starts each year?

We can analyze actual housing starts relative to the construction industry’s maximum potential capacity, just like economic production and employment. One example would be what was built versus our national capacity to build with our current resources.

We looked at different ways of determining Canada’s potential housing starts production. Our estimates indicate that starts in 2023 were far behind potential, as shown in Table 1.

There were 240,267 housing starts in Canada in 2023. Roughly speaking, Canada’s potential annual housing production could exceed 400,000 new homes.

*Calgary, Edmonton, and Vancouver.
**Numbers rounded.
Note: Population and labour productivity numbers were estimated for 2023. See the methodology section for further details.
Source: CMHC, Statistics Canada; CMHC calculations

Historical periods of high productivity

We looked at the average number of workers needed for each housing unit started first. This can be seen as an estimated measure of labour productivity in the residential construction industry.

From 1999 to 2004, workers per housing starts were much lower than current numbers, implying that productivity was higher 20 to 25 years ago.

We estimated that potential housing starts in Canada could have reached nearly 400,000 in 2023. This is about 70% higher than the total number of units started that year, we used current industry employment levels and assumed past productivity levels could be achieved.

Examining Canada’s top performing markets

In our most recent Housing Supply Report, the ratio of housing starts to population differed vastly across Canadian Census Metropolitan areas (CMAs), by a factor of 2 or more.

This approach looked at starts per population in Calgary, Edmonton and Vancouver. Historically, the ratio for housing starts is higher in these cities.

This approach assumes that housing preferences and situations are fairly consistent across the country, in theory. Other factors, such as economic context, industrial organization and regulations could influence this ratio differently across cities.

If housing starts across Canada mirrored the best performing markets last year, added supply would have been close to 430,000 new units.

Bottom line: regulation and production to the forefront

While the economic cycle, or the balance between homeowners and renters takes time to change, other factors are more easily influenced and yield faster results.

So, what needs to happen to get there?

The discrepancy in housing starts production relative to population across Canadian cities hints that regulation plays a significant role in whether building activity can accelerate — especially municipal regulation.

Consider the time it takes for things like permit delivery, regulations around how many storeys and units a building can contain, development charges (some are regulated at local and regional levels). This is just to name a few, there are many others.

Our 2022 municipal land and regulation survey highlighted that Toronto and Vancouver had heightened land use and regulatory constraints, while Alberta had more flexible regulation. British Columbia has since introduced regulatory flexibilities, to be implemented by municipalities, signaling a clear desire for improvement.

The Federal Government is also an active player

In addition to billions of dollars committed and invested in new construction and renovations over the past decade, it has recently introduced the Housing Accelerator Fund, a program designed to fund regulatory changes at the municipal level to accelerate housing construction.

To date, agreements have been reached with 179 municipalities under the Housing Accelerator Fund. Further, Canada’s Housing Plan recently added additional funding that will result in more agreements.

Regulation at the provincial level also plays a key role

For example, the Quebec Government is working towards fostering more flexibility in how different construction trades are hired on building projects, to increase residential construction activity.

The elephant in the room: how we build houses

We recently explained how the residential construction industry in Canada is highly fragmented.

Across Canada, nearly 69% of construction businesses have less than 5 employees. Surprisingly, only 1 company in Canada has more than 500 employees, in a country of over 40 million people!

Consolidation may help generate economies of scale, making the math work better to build affordable housing and enabling some production savings to be passed on to Canadians.

For years, the residential construction industry pointed to regulation as the most significant constraint to building more houses. Evidence shows that progress can indeed be made on that front, and all levels of government are adapting, but more must be done.

Recently, I argued that a broad mobilization was needed to fix our housing crisis. We should now engage in a discussion about how municipal and provincial regulation can further enable the scaling of housing development in Canada.

In addition to billions of dollars committed and invested in new construction and renovations over the past decade, it has recently introduced the Housing Accelerator Fund, a program designed to fund regulatory changes at the municipal level to accelerate housing construction.

A significant dialogue needs to occur on what employers, trades unions and employees in the residential construction industry are ready to contribute in terms of scaling up housing starts and getting Canada to its full potential, in exchange for greater regulatory flexibility.

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