Why Canada’s housing crisis is a productivity crisis, too

A shortage of housing prevents the country’s most productive cities from scaling up, blocking the mechanism through which local productivity gains spread into national income gains. Photo by National Post

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On April 9, Ricardo Hausmann, the founder and director of Harvard’s Growth Lab, will deliver the first talk of The Canadian Standard of Living, Productivity and Innovation lectures — a series of events focused on strengthening Canada’s standard of living hosted by the Centre for International Governance Innovation and sponsored by Savvas Chamberlain. Here, he and Growth Lab senior research fellow Eric Protzer explore how Canada’s housing crisis is holding the economy back.

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Canada’s lacklustre productivity growth is generally presented as an economic problem and its housing crisis is usually treated as a social problem. Those things are true, but there is also a deeper connection between the two.

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Much of the debate over Canada’s weak economic performance asks why the country has not generated more innovation, more scale and more world-class firms. But there is another question, just as important: When positive productivity shocks do occur, why does Canada so often fail to turn them into broader national prosperity?

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The answer lies in the interaction between two facts. First, growth in advanced economies has become increasingly biased toward knowledge-intensive activities that prefer large cities. Second, Canada’s urban regulations make it unusually hard for those cities to grow.

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Over the past half century, cities in high-income economies have shifted away from manufacturing and toward skilled services, technology, finance, life sciences and other knowledge-intensive sectors. This is not just industrial change. It is also geographic change.

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Older sectors often needed land, proximity to raw materials or room for large physical plants. Many modern sectors depend more on dense interaction among specialists. A major hospital works because many different kinds of expertise are available in one place. The same is true of software, finance, engineering, media and biotechnology. Production increasingly depends on bringing together many heads that know different things. Large cities have an advantage because they offer deeper pools of those specialized varieties of talent.

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That is why growth has become more metropolitan. Canada’s population growth has become increasingly concentrated in the country’s 10 largest cities. In the 1970s and 1980s, they accounted for only a bit more than half of total population growth. In the most recent period, they absorbed more than 80 per cent. That is the spatial footprint of a changing economy.

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So far, this is familiar territory: modern growth likes big cities. The deeper issue is what happens next.

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Toronto has room to accommodate more people in denser urban forms that are both livable and attractive. Photo by James MacDonald/Bloomberg

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The key concept is spatial equilibrium. People are free to move across cities within a country. They choose among job opportunities, wages, housing costs, commute times, schools and amenities. That means what happens in one city affects the whole economy.