A cornerstone of CMHC’s strategy for addressing Canada’s affordability crisis is increasing the supply of new homes. What is often overlooked, however, is the cost of building those homes. While low labour productivity may play a role, rising construction costs — compounded by government-imposed fees and charges — have become a major driver of the affordability problem.
Since the onset of the COVID-19 pandemic, residential construction costs have surged. Statistics Canada’s quarterly Building Construction Price Index (BCPI) tracks these costs across regions and building types, including residential. For years, construction cost trends were relatively uniform across major cities. After COVID, however, costs rose sharply, with some markets — such as Toronto — experiencing faster acceleration. Initially fuelled by supply-chain bottlenecks and labour shortages in the construction sector, these price increases have become entrenched. In less than five years, construction costs have risen by as much as 70 per cent.
These rising construction costs have implications not only for new homes but also for resale housing. Resale home prices generally align with their replacement costs, which roughly correspond to the prices of new homes. Some differences exist because the supply of existing homes in mature neighborhoods is less elastic than that of new homes in developing areas. This is due to the unique location and characteristics of established neighborhoods, which cannot be easily replicated, whereas land on the suburban fringe can be expanded more readily. As a result, the price of new homes is largely determined by construction costs rather than land scarcity. While this creates some pricing differences between resale and new homes, increases in construction costs are expected to be reflected in the value of both.
In response to these dynamics, CMHC’s new focus — after shifting the goal posts on its affordability targets by changing the reference year — is to improve productivity within the construction sector. While a sensible move in principle, the agency’s current recommendations fall short of offering the clarity and specificity needed to drive meaningful change.
Several are too vague to be actionable, such as developing and training workers with appropriate skills or sharing best practices and information on effective work processes. Others represent foundational efforts that should already be well-established, including broadening data standards to improve cooperation, coordination and planning. And some — like building incentives into programs to experiment and innovate — are initiatives where millions have already been spent with little or no return. We really don’t need another $580 million Affordable Housing Innovation Fund.
It’s encouraging that CMHC is drawing attention to the productivity issue – it’s a serious one. But the agency must move beyond diagnosing problems and put forward concrete, actionable solutions. Otherwise, its efforts risk being dismissed as the work of policy wonks disconnected from reality.
Independent Opinion
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