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Slowing population growth will help reduce some of the pressure on the housing market, but new research from Scotiabank says that affordability won’t improve much unless the sector’s productivity ramps up too.

In a new report, Scotia economists highlight the role of weak productivity in the construction sector — alongside Canada’s rapidly rising population — as a central factor in worsening housing affordability in the years since the pandemic.

Specifically, it finds that supply constraints — driven by declining productivity, higher construction financing costs, and higher building material costs — are responsible for a large share of rising house prices over the past five years.

Indeed, construction sector productivity is now at record lows, it said.

“This awful performance is the result of bottlenecks in the construction process coming largely from municipal regulation and red tape,” it said — which firms have been unable to offset with capital investments.

While record population growth in recent years has also hurt housing affordability, that concern appears likely to fade, as the federal government’s efforts to curb that growth through recent shifts in immigration policy appear to be working.

The good news is that productivity improvements could have a significant impact on affordability too, it said.

“Home prices would fall by about 1.2% for each 1% decline in unit labour costs,” the research found.

Indeed, productivity improvements are essential to improving affordability, it said.

“It is simply impossible for home prices, and affordability, to return to pre-pandemic levels without a substantial increase in productivity,” the report said. “Absent very significant action on that front, Canadians should expect only modest improvements in affordability at best.”

As it stands, Scotia is forecasting that home prices will rise over the next couple of years — with prices increasing just 0.4% this year and rebounding by 7% in 2026.

And, while affordability is expected to improve this year, it’s seen worsening again in 2026, “as the strong pick-up in house price growth dominates expected growth in per capita disposable income.”

Against that backdrop, the report said that easing regulatory constraints is needed to “make housing supply more responsive, which is the best option to sustainably reduce house price growth and improve affordability by better aligning house price growth with that of households’ income.”