Carney government should not ‘champion’ modular homes

The Carney government is telling Canadians that modular homebuilding will be a big part of the solution to Canada’s housing crisis—but only if this type of housing receives enough government preferences and subsidies. Canadians should be skeptical. If an innovative building method can deliver more homes, more quickly, and at lower cost, why does it need government help to succeed?

To be clear, many claims about the potential benefits of modular homebuilding—where some housing components are manufactured in a factory before being assembled on-site—may well have merit. Factory production could reduce costs by allowing homebuilders to produce large numbers of standardized components more efficiently. It could also make year-round construction easier than conventional building methods, which are more exposed to harsh Canadian weather. And a factory-based approach might attract more workers into homebuilding by appealing to Canadians who might prefer, or be better suited to, building housing components in a factory rather than conventional on-site construction.

These potential advantages should be framed as interesting possibilities, not assumed benefits. Because whether modular construction actually delivers these advantages is an empirical question—one that will vary by builder, market and project. The case for modular housing, in other words, is not something governments should simply presume.

Yet the Carney government is set to spend considerable sums of taxpayer dollars on a misguided effort to make these modular dreams come true. The core pitch to Canadians is that the potential benefits of modular homes will only be realized if governments “champion” (read: subsidize) innovation in this sector and “create a demand” for modular homes to help the sector achieve a larger scale (read: use tax dollars to support the construction of modular homes that Canadians might not have chosen for themselves).

There are several flaws in that logic.

The government is simply not well placed to make bets on which particular modular housing firms and technologies to back. Private investors who choose to invest in modular homebuilding are risking their own capital. That gives them a strong incentive to conduct careful due diligence—such as scrutinizing risks and evaluating market conditions—before making their investment. In practise, such investments will often be made by investors with deep knowledge of the homebuilding industry.

By contrast, Build Canada Homes (BCH), the government agency that will “champion” modular housing, operates under very different incentives. Its staff will allocate taxpayer money, not their own. And BCH employees are not necessarily selected for their ability to identify winning housing investments. Moreover, the career incentives of BCH bureaucrats are unlikely to be perfectly aligned with making the right long-term call. A private investor who backs the wrong firm bears the losses directly. A government official at BCH who backs the wrong firm or project may bear little cost at all—especially if the decision was politically fashionable at the time.

The argument that modular homebuilders need government support to scale up is similarly flawed.

Many Canadian businesses, including those advancing new technologies and production techniques, have scaled up without targeted government backing. That’s because, when the business case is as good as modular-housing boosters claim, private investors are typically eager to fund the growth of promising firms.

In fact, private investors are already making significant investments in Canadian modular homebuilding—but only to the extent they believe those investments will produce good risk-adjusted results. That’s a prudent way to invest, since the case for risking huge sums of money on new technologies and techniques should be made based on demonstrated results and the performance of specific firms—not a politically inflected wish that modular homebuilding, in general, will deliver more affordable homes.

The downside of dubious government bets on modular homebuilding won’t just be wasted tax dollars.

When governments subsidize homebuilding at the level of firms, building methods or individual projects, market participants cannot ignore where taxpayer money is flowing. Subsidies, preferred financing and tilted contracting can pull private capital toward politically-favoured firms, methods and projects that have not proved themselves in the market. Because homebuilding depends on scarce land, labour, materials and financing, steering resources toward subsidized modular construction also steers them away from other housing that Canadian buyers and renters might have preferred absent government intervention. As a result, even large government investments in modular housing may add little to total homebuilding investment and instead distort it, shifting resources away from the most promising firms and technologies.

There’s also a subtler but important political cost. Every hour that Canadian politicians devote to this kind of industrial-policy wishful thinking is attention not devoted to reforms that would have a better chance of increasing housing supply and improving housing affordability for the homes Canadians would actually choose for themselves—that is, the ones they decide to buy or rent absent government tilting the scales. Rather than trying to pick winners and losers in the homebuilding industry, the Carney government should minimize the federal tax and regulatory barriers that can impede private homebuilding.

To be clear, Ottawa—as well as provincial and municipal governments—should ensure that all forms of housing can be built without unnecessary tax and regulatory barriers. Because modular construction techniques are newer, they may face distinct policy obstacles beyond the ordinary taxes, rules and delays that weigh on housing construction more broadly. If a modular home is the right choice for a particular project, governments should allow it to proceed without needless red tape. In other words, the proper role of government is to ensure that regulations permit modular housing where it makes sense—not to subsidize it or give it special treatment (e.g. with preferential procurement on government-backed projects).

Modular homebuilding methods might be the right choice for many new homes in Canada. But that is a case for permitting modular homebuilding, not privileging it. Ottawa should remove barriers to homebuilding, including for modular homes, without subsidizing or privileging one construction method over another.