Canada's Housing Crisis Is Also a Productivity Crisis, Experts Warn

Canada's Housing Crisis Is Also a Productivity Crisis, Experts Warn

Canada's lackluster productivity growth is typically framed as an economic challenge, while the housing crisis is viewed as a social issue. However, according to Ricardo Hausmann, founder and director of Harvard's Growth Lab, and senior research fellow Eric Protzer, these two problems are deeply interconnected. Their analysis reveals that housing shortages are actively stymieing national economic progress by preventing people from relocating to regions where productivity is rising.

The Hidden Connection Between Housing and Economic Performance

Much of the debate surrounding Canada's weak economic performance focuses on why the country hasn't generated more innovation, scale, and world-class firms. But Hausmann and Protzer pose an equally critical question: When positive productivity shocks do occur, why does Canada frequently fail to translate them into broader national prosperity?

The answer lies in the interaction between two fundamental facts. First, growth in advanced economies has become increasingly biased toward knowledge-intensive activities that thrive in large urban centers. Second, Canada's urban regulations make it unusually difficult for those cities to expand and accommodate new residents.

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The Geographic Shift Toward Knowledge-Intensive Cities

Over the past fifty years, cities in high-income economies have shifted away from manufacturing and toward skilled services, technology, finance, life sciences, and other knowledge-intensive sectors. This represents not just industrial change but significant geographic transformation.

While older sectors often required land, proximity to raw materials, or space for large physical plants, modern sectors depend more on dense interaction among specialists. Major hospitals function effectively because numerous different kinds of expertise are available in one location. The same principle applies to software development, finance, engineering, media, and biotechnology.

Production increasingly relies on bringing together diverse minds with specialized knowledge. Large cities possess a distinct advantage because they offer deeper pools of that specialized talent, creating environments where innovation and productivity can flourish.

Canada's Urban Concentration and Its Consequences

This explains why growth has become more metropolitan. Canada's population growth has become increasingly concentrated in the country's ten largest cities. During the 1970s and 1980s, these urban centers accounted for just over half of total population growth. In recent years, they have absorbed more than eighty percent of population increases.

This concentration represents the spatial footprint of a changing economy. However, the deeper issue concerns what happens next. The critical concept here is spatial equilibrium—people are free to move between cities within a country, choosing among job opportunities, wages, housing costs, commute times, schools, and amenities. This mobility means that developments in one city inevitably affect the entire national economy.

How Housing Shortages Create Economic Bottlenecks

A shortage of housing prevents Canada's most productive cities from scaling up appropriately. This blocks the essential mechanism through which local productivity gains should spread into national income improvements. When workers cannot afford to live in cities where productivity is rising, they remain in less productive regions, creating a drag on overall economic performance.

Toronto, for instance, has room to accommodate more people through denser urban forms that are both livable and attractive. Yet restrictive regulations and development barriers prevent this necessary expansion. The result is a frozen labor market that cannot respond efficiently to economic opportunities.

This housing-induced stagnation represents a significant cost to all Canadians, as potential economic gains remain unrealized. The inability to turn local productivity improvements into national prosperity means everyone pays the price through slower income growth and reduced economic dynamism.

Hausmann will elaborate on these themes during his upcoming lecture on April 9, as part of The Canadian Standard of Living, Productivity and Innovation series hosted by the Centre for International Governance Innovation and sponsored by Savvas Chamberlain. His presentation will focus specifically on strengthening Canada's standard of living through addressing these interconnected challenges.