As prospective Canadian homebuyers and renters struggle to gain a foothold in one of the least-affordable housing markets in the developed world, housing affordability has become one of the top concerns across the country. Canada\u2019s housing crisis is largely a function of burdensome municipal rules that constrain supply and inflate prices. Meanwhile, misaligned incentives constrain local officials\u2019 willingness to make the necessary changes.<\/p>\n
Ottawa should use both carrots and sticks to get municipalities to increase housing supply. Though the Carney government has taken some steps to incentivize municipalities to cut red tape, its housing strategy remains overly dependent on direct funding and control from Ottawa. There is no reason it cannot correct course by doubling down on the former and abandoning the latter. If it fails, prices will only continue to climb.<\/p>\n
Canada’s Housing Crisis is A Supply Problem<\/strong><\/p>\n In a free housing market, builders are free to build, and homeowners and landlords are free to negotiate prices and rents with their potential customers. When prices rise, developers build more units to earn higher profits, and competition eventually pushes prices back down, resulting in a natural supply of affordable housing.<\/p>\n This is, of course, an abstract ideal. In reality, even the least-regulated housing markets in the developed world impose some restrictions on new housing supply. Houston, Texas, for instance, mandates minimum lot sizes for single-family homes, despite its well-earned reputation for a hands-off approach to housing regulation.<\/p>\n But municipal development restrictions in Canada go much further. Builders in cities across the country are subject to every sort of regulation imaginable, from density limits, to strict zoning rules, to sky-high development fees, to restrictions on building characteristics like height, dimensions, and materials. Put together, these regulations severely restrict supply and push home prices through the roof. Complying with mountains of red tape costs money, and builders pass on those costs to consumers, knowing that they have no choice but to accept the higher prices to find somewhere to live.<\/p>\n The most comprehensive study of the relationship between regulatory stringency and home prices in Canada was carried out by the Canadian Mortgage and Housing Corporation (CMHC) using its Municipal Land Use and Regulation Index, an indicator of how swiftly and efficiently a city approves development proposals. The index encompasses barriers to construction like development fees, long approval timelines, and the complexity of planning requirements, among other measures. To test the effects of municipal rules on housing affordability, the CMHC compared cities\u2019 scores on its index to their average home prices.<\/p>\n The results of the study are striking: for every 10% increase in regulatory restrictiveness, housing supply growth falls, and home prices jump by 14%. To make this concrete, imagine a three-bedroom condo selling for $250,000 in a medium-sized town in Alberta. Given the CMHC\u2019s finding that the average city in Ontario scores 15% higher on their index than the average city in Alberta, that same condo would sell for around $300,000 in an average Ontarian city. A full 17% of the price of that home ($50,000) would be due to stricter regulation alone, enough for a 20% downpayment on that same unit in Alberta.<\/p>\n Another useful metric for measuring the effects of regulation on home prices is the gap between construction costs and sale prices. Though competitive markets do tend to push prices down, this tendency has a natural limit: if prices fall below production costs, firms lose money and eventually go out of business. Therefore, a basic prediction of economic theory is that over time, competitive markets push prices down to the cost of producing an extra unit of the good being sold \u2014 what economists call the marginal cost of production.<\/p>\n In housing markets, the marginal cost of production is the construction cost. If homes are being sold for considerably more than what it costs to build them (plus some wiggle room for profits), there is a good chance that external, anti-competitive forces like municipal regulations and development fees are artificially inflating prices.<\/p>\n The CD Howe Institute estimates that a single-detached home in Toronto costs an extra $350,000 to buy than to build, even leaving room for a reasonable profit margin, set at 17%. In the British Columbian municipalities of Abbotsford-Mission, Kelowna, and Victoria, the figure ranges from $255,000 to $415,000. In Vancouver, it is a whopping $1.3 million.<\/p>\n It is no wonder that nine in ten Canadians are worried about the state of the country\u2019s housing market. From 2000 to 2025, the average home price rose from $163,524 to $718,400, a 339% increase. Over that same period, general inflation was a mere 55%. Even if wages always kept perfect pace with inflation (which they did over that time period), they would come nowhere close to keeping up with housing price growth. Burdensome municipal rules and the resulting supply constraint have made Canada one of the least affordable housing markets in the developed world.<\/p>\n Misaligned Incentives Make Cutting Red Tape Difficult<\/strong><\/p>\n All of this raises an obvious question : if stringent housing regulations are so obviously bad for Canadian consumers, why do municipalities continue imposing them? Unfortunately for prospective homebuyers and renters, municipal governments face a bevy of political, fiscal, and ideological incentives that make cutting red tape to stimulate housing growth difficult.<\/p>\n Take William Fischel\u2019s famous Homevoter Hypothesis, which argues that homeowners are disproportionately likely to participate in local politics to protect and enhance the values of their homes. A 2014 paper by Michael McGregor and Zachary Spicer found considerable evidence for this view: Canadian homeowners are disproportionately likely to turn out to vote in municipal elections and to oppose the construction of social housing. This phenomenon may help explain the phenomenon of NIMBYism (NIMBY stands for \u201cnot in my backyard\u201d), whereby local residents\u2019 associations in cities across Canada oppose new development in their neighbourhoods. Evidence from studies in the United States suggests that homeowners are more likely to participate in neighbourhood and block associations, and to oppose local housing construction.<\/p>\n Such behaviour is, of course, understandable. In 2025, just under half of Canadian households\u2019 net worth was tied up in real estate. This means that an awful lot of Canadians depend on their homes for financial security and retirement. A sudden drop in home prices would imperil this wealth.<\/p>\n This confluence of factors creates a thorny problem for local officials. The political fates of municipal politicians likely depend on homeowners whose retirement plans depend on onerous rules that inflate home values \u2014 the very regulations that are responsible for Canada\u2019s housing crisis.<\/p>\n But rent-seeking \u2014 manipulating the political system to benefit oneself without creating value \u2014 always benefits someone. This fact does not justify the behaviour, especially given the high costs to the rest of society. Additionally, the CMHC estimates that even if the rate of housing construction were to double, it would take 10 years just to restore affordability to 2019 levels. Current homeowners would have ample time to adjust, either by selling early, or by moving money into more profitable investments. Either way, it is no argument in favour of artificial supply constraints that some people stand to lose from a return to fairness.<\/p>\n Local politicians also face fiscal incentives to restrict development. A recent Desjardins report found that Canadian municipalities have become addicted to development charges to finance infrastructure budgets. As the report recognizes, the initial logic behind these charges was sound: as cities expand, they require upgrades to supporting infrastructure, which they may decide to finance through fees levied on developers rather than tax increases on residents.<\/p>\n As the report points out, however, these fees have begun to far outpace the underlying costs they were initially meant to cover. Across the twenty-seven Ontario municipalities studied, development charges increased by 500% over the last two years, as the number of services eligible for development charge financing expanded. Meanwhile, construction costs and general inflation increased by between 55% and 140% over that period, suggesting that municipalities increasingly view development charges as a general fund for local infrastructure rather than a targeted measure to finance specific needs.<\/p>\n It is also important to acknowledge that individual municipal regulations often have genuinely laudable goals. It is only when stacked on top of one another that their good intentions become a mess of red tape that restricts housing development.<\/p>\n Take the Toronto Green Standard, a complicated local regulation with which new developments must comply to gain environmental approval from the city. The regulation evaluates building proposals on a thicket of criteria, from its effects on air quality and energy usage to their potential effects on the number of \u201cbuilding-related bird collisions\u201d (yes, seriously). For its part, the City of Vancouver restricts construction that might affect certain protected \u201cpublic views\u201d while awarding developers the right to build more floor space in exchange for public amenities like parks and childcare centres.<\/p>\n If we begin with the premise that the primary goal of housing development is to provide people with affordable places to live, then these regulations seem absurd. But if we take them individually, it is easy to see how well-meaning politicians could support them. After all, who could object to incentivizing the building of parks, or to protecting beloved mountain views, or local birds? But the upshot of trying to do all of these things at once (and much, much more) is a housing market plagued by regulatory hurdles that make housing prohibitively expensive to build, and thus to buy.<\/p>\n Affordable Housing is Not A Luxury Good<\/strong><\/p>\n But how to disentangle the effects of regulations from those of high consumer demand? How do we know that cities are not simply \u201cluxury goods,\u201d as then-mayor of New York Michael Bloomberg rather infamously characterized his city in 2003?<\/p>\n On some level, Bloomberg was right. Basic economic theory says that when lots of people want something, prices will rise in response. Big cities whose populations are growing will always have higher home prices than the small town an hour\u2019s drive away. But this need not lead to the absurd levels of unaffordability that we see today.<\/p>\n First, homes in smaller Canadian cities are by no means exempt from the price effects of excessive regulation, giving the lie to the notion that housing unaffordability is only a problem in big metro areas. Aspiring homeowners in Vancouver might suffer penalties exceeding $1 million per unit, but price hits in the hundreds of thousands of dollars in smaller cities like Abbotsford-Mission, Kelowna, and Victoria are nothing to scoff at.<\/p>\n But the greater reason to be skeptical of the Bloomberg argument is that there are notable counterexamples that demonstrate that rising demand is compatible with affordable housing, the most striking of which is Houston. From 2022 to 2026, the population of the Houston metropolitan area increased by between 1.18% and 1.58% per year (Houston is now the fourth-most populous metropolitan area in the United States). Over that same period, by one measure, the average home price in the city actually fell by around $14,000. The average Houston home listed on Zillow, a popular online real-estate market, is selling for $265,000 as of the time of publication.<\/p>\n The explanation is simple: Houston avoids heavy-handed regulation while using targeted rules to promote neighbourhoods that are flexible, yet livable. For instance, though Houston\u2019s zoning rules are lax compared to other big cities, it does mandate minimum lot sizes. However, reforms in 1998 and 2013 drastically reduced these requirements, resulting in the conversion of thousands of single-family homes to town houses. At the same time, Houston has allowed sprawl beyond its city limits, preserving the character of suburban neighbourhoods while allowing them to expand in response to growing demand.<\/p>\n The upshot of these policies is that when land or home values rise, it is easy for builders in Houston to simply add more homes, and for owners to convert single-family homes into multi-family units. Aspiring homebuyers and tenants thus continue to find affordable places to live, even as housing demand continues to grow.<\/p>\n Carrots are Not Enough<\/strong><\/p>\n There is no reason the Canadian housing market cannot resemble Houston\u2019s, but Canada\u2019s current housing strategy will fail to get us there. Its fundamental flaw is that it largely takes the existence of onerous municipal regulations for granted, and attempts to directly command affordable home construction from Ottawa through direct funding. This is unlikely to work, because it leaves the root of the problem unsolved.<\/p>\n Take Build Canada Homes \u2014 announced by Prime Minister Mark Carney in the fall of 2025 as a major plank of his housing policy \u2014 as an example. The agency\u2019s role is to \u201clead the planning, management, and construction of affordable housing,\u201d providing direct financing to \u201cnon-market and Indigenous housing providers\u201d and helping \u201cgenerate demand for innovative and sustainable building methods like factory-built and prefabricated construction.\u201d<\/p>\n In other words, it will throw government money and bureaucracy at a problem that was created by government money and bureaucracy. By recognizing the shortage of affordable housing while papering over its underlying cause, Build Canada Homes seems poised to layer government process on top of a problem that can only be solved by cutting red tape.<\/p>\n To be fair, Carney\u2019s housing strategy also includes the CMHC-administered Housing Accelerator Fund, which financially rewards cities for increasing their housing supply. In theory, this is a step in the right direction. But according to the CMHC\u2019s own projections, the fund will lead to the \u201cfast-tracking\u201d of, at most, 700,000 new units over the next decade. The CMHC estimates that to restore affordability to 2019 levels (to say nothing of 2009 or 1999 levels), the country would need to add over 400,000 new units per year over that time period, for a total in excess of 4 million units.<\/p>\n To even have a prayer of achieving these numbers, the government should abandon the pretence that it can simply throw more taxpayer money at the problem. It should begin by scrapping all government funding for housing construction that would happen anyway if local governments would simply get out of the way.<\/p>\n Then, it must realize that carrots won\u2019t be enough to significantly move the needle on housing supply, not when the shortage is this drastic, and certainly not when the incentives facing local politicians all push in the wrong direction. Ottawa must be prepared to also use sticks to get local governments to increase housing construction. Municipalities rely on federal and provincial transfers for 21% of their budgets, helping fund a variety of critical projects from transit to infrastructure to waste management. The federal government should coordinate with provincial governments to use this funding as leverage to get local councils to cut red tape. It can then use programs like the Housing Accelerator Fund to sweeten the deal for compliant cities.<\/p>\n Supporters of the government\u2019s current approach may object that this suggestion is impractical. After all, the federal government has limited influence over local politics. But any proponent of this argument must then also object to the Housing Accelerator Fund, which already meddles in municipal affairs. Adding sticks to the Fund\u2019s carrots is not any more impractical than the incentives that are already in place.<\/p>\n Local governments have been unwilling or unable to cut regulations of their own accord at the necessary speed and scale. The result is a housing shortage that has made Canada one of the most unaffordable real estate markets in the developed world. If the federal government does not force municipalities\u2019 hands, the country\u2019s housing crisis will only deepen.<\/p>\n