Can Factory-Built Homes Solve the Housing Crisis?

In this episode, conservative pundit Sabrina Maddeaux and economist Mike Moffatt discuss the potential of factory-built homes as a solution to the housing crisis.

They explore the promises made by politicians regarding prefabricated housing, the spectrum of factory-built homes, and the claims of reduced construction times, costs, and emissions. The conversation delves into the current challenges faced in North America, including regulatory barriers and municipal approvals.

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Below is an AI-generated transcript of the Missing Middle podcast, which has been lightly edited.

Sabrina Maddeaux: So both the federal Liberals and the provincial Conservatives in Ontario included campaign promises related to factory-built housing. The Liberals promised $25 billion in debt financing and $1 billion in equity financing to innovative Canadian prefabricated home builders. Whereas the Ford Conservatives promised $50 million to support more factory-built homes and innovative home-building technology. So that's where we're starting off with this episode.

Mike Moffatt: So, Sabrina, like you hear these promises from politicians, and they're unusually filled with jargon for political promises. So you hear “prefabricated homes” and “factory-built homes.” Like, what do you picture in your mind when you hear a politician use those terms?

Sabrina Maddeaux: The thing for me is I picture innovation. I had a really interesting conversation a couple of years back, actually, with Scott Aitchison, who's a federal Conservative MP and also their shadow minister - at least he was in the last parliamentary session, shadow minister for housing. And he was talking about the opportunity for innovation in the housing sector, particularly when it comes to modular homes and factory-built homes. And he made an interesting comparison that if you look at other major technologies like airplanes, and we were still building airplanes the same way we were 50, 60 years ago, people would be like, that's really messed up. ‘Why haven't we moved forward and innovated? We should probably do something about this.’ And yet, when it comes to homes, we're largely building them and thinking about them the same way.

So for me, it's an opportunity to talk about doing something that meets the moment and our future needs, rather than staying in the past, which is where we often are about housing. But the question is: What does this look like?

And that's, of course, something we're about to get into, because it seems like governments across North America are making some rather large investments in the factory-built housing construction industry.

So what exactly are they talking about when they're talking about factory-built homes or prefab housing?

Mike Moffatt: Yeah, there's a lot of different jargon here, which is a bit of an issue.

A recent Ontario Real Estate Association report is advocating for standardizing some of these terms. And we will link to that report in the show notes. But I would think of it as a spectrum, right? In traditional home building, you're building a single detached home, and we can all picture it in our minds. Most of the work is done on-site. There is a small factory-built component to it. So, for instance, a roofing truss, most of the time it is actually built in a factory and then shipped over just because it's much quicker, easier, and faster. It's a challenging thing to do on-site.

So the Ontario Real Estate Association report would say that traditional construction is anywhere from 0% to 10% factory-built approaches. Then you could get the other side of the spectrum, where you're building something like a mobile home or something like that, which could be 100% built in the factory, and then just put on wheels and taken to wherever it needs to be. But there's a lot within the middle of that spectrum.

So, there are some really innovative companies, Caivan, which has a plant just out here in Ottawa, that builds sections of homes, and then trucks them to the site. And the homes just look like any other home. There's a foundation poured, and these things are put together, like Lego, and so on.

You have things called panelization, which is more in the 50% range, where half of the home is built in a factory, half of it is built on site or assembled on site. So really, we're talking about a spectrum of approaches here.

The core idea is to move home building a little less away from construction that's done on site, to more of a manufacturing-based industry that's done in a plant.

Sabrina Maddeaux: I'd like to talk about a specific claim the Liberals made in their platform. And this is a quote from that pre-fabricated and modular housing can reduce construction times by up to 50%, costs by up to 20%, and emissions by up to 22% compared to traditional construction methods. Now, I'd like you to assess these claims one at a time.

And is pre-fabricated housing actually faster than existing methods?

Mike Moffatt: It certainly can be. And I don't know exactly where the Liberals got these exact numbers from. But the short answer is yes.

You mentioned building an airplane. I like to think of it as building a car. If you're building a car, one way to do it is to build it on site. Imagine building a car piece by piece in your garage. And you can do that. A lot of guys my age do that. (You're basically, once you turn about 45, there's like 12 different hobbies you can have as a middle-aged guy, and that's one of the 12.) So you could build, restore classic cars that way. But it takes a really long time, as those guys my age will tell you. But if you build cars in a factory, you can take assembly line approaches, and you just turn these things out one after another.

So if we take the same approach to home building, treat it as a manufacturing industry, we can crank out a lot more homes. Because what you can do is you can run multiple shifts. Traditional home building is very nine-to-five. You have a job site that people go to. And if the weather's really bad, then nothing happens. Whereas if you're building in a factory, you can run three shifts a day. You can have robots working 24 hours or so on. So it can greatly speed up the process.

It doesn't solve every problem, because obviously, you still need to get the home from the factory to the site. If it's more penalization, you're still doing a lot of the work on site, but you're getting rid of a lot of those intermediate steps.

Sabrina Maddeaux: So yeah, you could save a bunch of time on that. And does that also explain why it's often cheaper than traditional methods?

Mike Moffatt: Yeah, exactly. For the same reason, the robots can do a lot of the work. So there's cost savings there. But also because you have robots doing it, they work to a higher tolerance. So, if they're programmed well, there are fewer errors, there's less waste, that kind of thing. So the cost savings can be quite substantial.

Sabrina Maddeaux: Yeah, I notice you're saying “can” rather than “is” in a lot of your answers. So I guess the key question: Is it any faster and cheaper right now?

Mike Moffatt: Short answer is no, at least not in North America.

There are places where these approaches have reached scale, like Sweden and Japan are two examples. And there they are cheaper, they are faster. But in North America, no. And the reason is that a lot of it has to do with scale and learning by doing.

So I like to use the example of the solar industry, for example. You go back to the 70s, 80s, 90s, and solar panels were incredibly expensive. So they had very limited application outside of solar calculators and the like. Some people would put them on the roof, but they weren't a very cost-effective way of generating electricity. But as companies started producing more and more solar panels, they got better at it, the technology improved, and there were vast improvements made by learning by doing. So the same idea applies here, we are at a point in the innovation curve, where it tends to be more expensive than traditional methods, because we haven't reached scale yet. But if we can create the conditions for these companies to produce that volume, along with…you need robust competition. So we need multiple companies, multiple approaches, and we should be able to see a vast improvement in speed and cost.

But you totally called me on it, that I kept saying “can” instead of “does.” And that's why. These companies haven't reached scale yet.

But the hope of policymakers is that with appropriate public policy, these companies can reach scale.

Sabrina Maddeaux: And now those reductions in emissions we're hearing about, are they from higher tolerances and lower waste?

Mike Moffatt: Yeah, exactly. And they can also just be made out of different materials, because you're in climate-controlled conditions. So there can be benefits there. A lot of what you're seeing in this industry is the use of products like mass timber, which it's a renewable resource, and so on, you're getting more towards wood, a little bit less from cement. So part of it is that tolerance. But part of it is [that] it opens up different materials to the builder. And many of those materials can have inherently lower emissions. And these buildings, again, because of that tolerance, can be made more energy efficient.

Now, it seems like the sustainability pitch would be something that Millennials and Gen Z would really care about. But do you think that's getting through to them? Are they more focused on things like cost and style?

Sabrina Maddeaux: Yeah, the short answer is no.

Well, certainly, that's part of the pitch. I just don't think the sustainability and lower emissions aspect is what's going to drive younger people to these options.

We even see it in political polling. Climate change and sustainability used to be the top issues for a lot of younger people, and now cost of living and housing affordability have replaced that. Because ultimately, you need somewhere to live first. And then, often, you care about these other things.

So I think the way to really appeal to young people is through cost; you can actually have a home, whether it's an affordable rental or a place to own. But then, yes, also through making these options appealing in terms of having living space for your family in terms of style.

So if I were the Liberals, I wouldn't focus quite as much on the sustainability part, and really advertise and market this as a solution based on those other factors.

Mike Moffatt: Yeah, I can totally see that. I tend to think of Maslow's hierarchy of needs, right? And if you just want a home, you just want it to be suitable. Yeah, it'd be great if it were lower emission, energy efficient, and so on. But, I see those as being nice to have, not your sort of primary concern.

And speaking of nice to have versus primary concern. Another thing I'm curious about is when you talk to younger folks, your cohort, do they worry that these manufactured homes, prefab homes, whatever you want to call them, are just going to be a bunch of cookie-cutter houses? Is that a concern that your generation has?

Sabrina Maddeaux: I have to say that I think outside of more niche housing circles, and people like us that really pay attention, the concept of factory-built homes, prefab housing, is still pretty new.

So I think your average younger person probably hasn't given this a lot of thought, which presents a great opportunity. Because if this is marketed in the right way, I think young people will really come around to this.

Even for myself, when I first became more familiar with modular housing a couple of years back…one of the first ways I encountered it was I have some family out east in New Brunswick in Nova Scotia. And there's actually quite a booming business out there in these luxury modular cottages that they're building in more rural areas, often by the ocean, and they're beautiful - big windows, you would never know the difference - a place that I would absolutely love to live. And I'm sure many young Canadians would love to live. So, really showing the possibilities there.

And I think when we're looking at whether it's government housing, pre-approved catalogues, making sure that the designs are appealing, because aesthetics are a thing. It's an opportunity to sell the public on this, especially because I think a lot of young people are less familiar.

I think where you might actually encounter more resistance is if you're looking at, for example, downsizing seniors or baby boomers who have thought about homes in a particular way for so long, and might be a bit more resistant to changes in how they expect a home to be built.

For me, though, this all leads to the obvious question, which is: If prefab homes are so great, then why aren't we doing it already?

So you've already pointed out a few problems. The first is differences in rules across provinces and municipalities. What do you mean by that? And can you explain a bit more about why that's such a huge problem?

Mike Moffatt: Yeah, I think we have to sort of figure out.

Okay, why are we still at that point in the cost curve or the innovation curve where this hasn't achieved scale? And a lot of that is differences in regulations across provinces, or even across municipalities. I'm thinking of things like building code, accessibility requirements, and so on. So you have different rules in different places, in different municipalities. Let's say accessibility rules that minimum door widths have to be a certain size. And all of these municipalities, or provinces, they're all trying to solve the same problem: Like, okay, we want to make sure that people with mobility issues and people in wheelchairs are able to easily enter and exit. But if they're coming up with different answers to that question, if you don't have that policy alignment, then it's hard to build homes that work everywhere, because you're building to a different set of rules.

So the example I like to use is automotive. Imagine what automotive manufacturing would look like if you owned a car in Brampton and the gas tank had to be on the driver's side. But if you owned a car in Mississauga, it had to be on the passenger side. And in Caledon, it had to be behind the bumper. Well, it would be hard to achieve scale in automotive manufacturing.

If you're having to have different standards …manufactured to different standards, in like three different municipalities in Peel region, let alone differences between Ontario and Quebec and other places, you'd never be able to achieve any scale.

And that's one of the things that's happened with modular home building and prefabrication. Because you have all of these different rules all over the place, you really do have to create bespoke homes because of these regulatory differences.

Sabrina Maddeaux: Yeah, when you put it in the context of that car comparison, it's absolutely insane!!!

So you've also talked about municipal approvals being an issue. Why do they matter here? And I also have to ask, with so much red tape getting in the way of these homes, is it really the best course to dump 10s of billions of taxpayer dollars to companies rather than focusing on just freeing the market, so to speak?

Mike Moffatt: Yeah, so municipal approvals are a huge, a huge one. And beyond just the differences in regulations, you also need the approval side, particularly for any of the homes that require foundations.

I had a modular home builder explain this to me about a year ago. So if you think about it, again, let's use traditional automotive manufacturing, you want your plant running 24 seven. You want to keep cranking out cars. You're going to do that, even if there are disruptions that make it a little bit challenging to get those cars to the market tomorrow.

What you do is you build the car, you put it out in a parking lot, you put a tarp over it. And you can do that for a long time. And, there are pictures of Tesla, who has these giant lots, you have like 20-30,000 cars sitting there. You can't do that in home building because you need to keep these homes in a climate-controlled condition before they're assembled on site.

So this company was saying that they basically have enough room for seven homes. That's the amount of factory and warehouse they have and once they hit seven, they can't build an eighth until one of them leaves. So if there are municipal delays on pouring the foundation, then things just stop. So that makes it challenging on top of…there can be delays because of acts of God, weather, that thing. So it's the ultimate just-in-time industry.

Now to the question of pouring lots of dollars here, I'd say a couple of things. First, it isn't as many dollars as it looks. Politicians love to announce these big numbers. But a lot of this is things like loans and so on. So, how much this actually costs the government depends on what those loan conditions are. Obviousl,y whether or not those loans get paid back. So it's more of a risk thing than a cost thing. But I think your general thinking is correct. That you have to not only provide the financing, the policies and so on, you've got to also knock down all of these other barriers, right? Or else this isn't going to work.

Otherwise, you build a bunch of factories, you build a bunch of homes, and then you can't get them on site because of delays in municipal approval. Or, you're never achieving economies of scale because of that gas tank problem.

I think one of the things that the Liberals are trying to do with their platform is identify the five or six or seven barriers to this industry and knock them all down. And one of the barriers is financing, but it's only one of about half a dozen.

Sabrina Maddeaux: One thing that strikes me is that issues like building codes and local approvals are among the biggest issues for traditional home builders as well. So am I right in thinking that one of the biggest benefits of the push towards more modular housing isn't only the modular homes themselves, but actually this would force us to make a bunch of changes that are also really good for traditional home builders?

Mike Moffatt: Yeah, that's the irony here that we have to make for this modular factory-built approach to work. We have to make a whole suite of regulatory changes. But those are the same regulatory changes that the traditional home builders have been asking for for decades. Regulatory harmonization, more predictable approval processes and so on.

So, we can look at what governments are doing here on prefabrication. Yes, they're making changes for their own sake, but it is backdooring a bunch of other changes that we should have made decades ago, but we really didn't. So absolutely.

I actually see that one of the big benefits that both the provincial focus and the federal focus on prefabrication is having is that it's forcing us to make a bunch of regulatory changes that we should have made decades ago, but didn't for whatever reason.

Sabrina Maddeaux: Here's the key question, though. Are you at all optimistic that this will actually work?

Mike Moffatt: Well, a lot has to go right.

As I mentioned, you've got about six or seven different bottlenecks to growth on this, and governments have to address all of them.

The other challenge here is that we've seen since the end of World War II in both Canada and the United States, whenever there's a housing shortage or a housing boom, you do see a lot of these companies pop up and start doing innovative things. The challenge is that once we hit a recession, home building starts to fall. A lot of these companies don't make it out to the other side.

As a traditional home builder, if you're in a recession, not many homes are getting built. You just don't hire electricians and plumbers, and roofers for a while. You keep a skeleton staff,f and you can ride it out.

You can't really do that if you've got factories and robots. Now, I will say the federal government understands that problem. And one of the things that they're talking about is when we are in a housing lull, ordering homes from these companies as social housing to both get the companies through the recession, but also, we just need more social housing.

So what the government can do is buy, let's say, 10,000 units of housing from these companies, but then say, ‘Look, deliver them whenever you can. If it's tomorrow, fine. If it's five years from now, that's fine, too. Just build these things whenever you have a lull.’ That can help get them through the recession. But it can also help these companies get financing from the private sector because then they can go to one of the big lenders and go, ‘Look, we're actually a little bit less risky of an investment as it looks because we have these guaranteed orders in our back pocket.’ So there are policy solutions out there to help with the recession problem.

The other thing that could happen, that I don't think anybody's thinking about, is the risk that we might be too successful, which sounds a little bit weird. But if the policy environment becomes really beneficial to modular and prefab homes, a lot of the biggest companies in the world are not Canadian in this space. Right? So, at that point, do you start to attract Swedish companies? Do you start to attract Japanese companies?

Now, that's not necessarily a bad thing because they're going to be producing here in Canada, creating a lot of jobs. But we might not get the situation that policymakers think we're going to get - that this will create a bunch of national champions in the space. Instead, we might see some of the big international players go, ‘Hey, yeah, we want to produce in Canada’, the same way that we have with automotive - there are no real Canadian car companies or at least automotive assemblers. But we assemble a lot of cars here because of Japanese and Korean, and American companies.

So, same question to you. Do you have any hope that the policies announced by both parties, Liberals and the Ford Conservatives, are going to work here?

Sabrina Maddeaux: I am hopeful because I think that it's a much-needed track to take, as I said, to be more innovative in how we build housing. And I want to touch on what you said at the end.

For me, I've always said that the mark of a successful market of any kind is competition. And that includes international competition. So yes, of course, we want made-in-Canada and we want to support a Canadian industry here, but if we can get to the point where we have really strong Canadian builders and makers and also international competition, so that there's consumer choice, there's competition on prices, that would be amazing, like bring on! The more homes, the more options, the better, in my opinion. So I'd absolutely love to see that.

And I hope that policymakers don't get too narrow and over-prescriptive in their focus on what this could look like, so that the market can grow naturally and become an appealing option. Because ultimately, if it gets siloed to just one type of housing, whether that's social housing or just certain demographics, this won't have the impact that it potentially could.

So, I say scale is big. We haven't had a great track record in Canada doing things at scale lately. But hopefully, this could be an opportunity to change that.

Thank you, everyone, so much for watching and listening and to our producer, Meredith Martin.

Mike Moffatt: If you have any thoughts or questions about gas tank doors, please send us an email to missingmiddlepodcast@gmail.com

Sabrina Maddeaux: And we'll see you next time.

Additional Reading that Helped Inform the Episode:

Building More, Building Faster

Caivan

Why is it So Hard to Mass-Produce Housing?

Eight Pieces of Housing Advice to the Prime Minister

This podcast is funded by the Neptis Foundation

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