To date, the discussion on housing affordability, dominated by handwringing over foreign homebuyers and low interest rates, has primarily focused on demand-side issues while ignoring the fact that when a good is in high-demand, it generally spurs greater supply.

But a recent study by the Fraser Institute takes a closer look at the gap between demand and supply in several large Canadian urban regions, including Toronto and Vancouver, and finds that long and uncertain approval timelines for building permits, as well as onerous fees and local opposition to new homes, contribute to the housing supply’s inability to keep up with demand. The result—fewer new homes with a growing pool of buyers inevitably leads to rising prices.

Instead of targeting one segment of the housing market for a tax hike (i.e. the newly minted 15 per cent additional tax on foreign homebuyers in Metro Vancouver), policymakers should look to factors preventing the housing supply from keeping up with all demand. Increasing the construction of new homes in Canada’s most desirable regions would, eventually, put downward pressure on housing prices.

While the intention of such taxes is to dampen demand from abroad, it isn’t clear to what extent they will work. Local housing markets are complex. There are many factors that contribute to both the supply and demand of housing construction. Attempting to control one segment of housing demand could lead to a host of unintended consequences.

For instance, if taxing foreign buyers impacts demand for residential real estate in some cities, where might that demand migrate to? The geographical limits of these taxes may simply nudge buyers towards nearby municipalities—or to Canada’s other major urban centres, presenting a new set of challenges.

Policymakers are rightly concerned about housing affordability, but a jarring shift in policy could change market expectations, leading to unpredictable consequences. In the event that the tax does significantly shift demand, long-time owners could lose out on equity they planned to use for retirement and families who recently entered the market may face difficult circumstances if their home values suddenly decline.

Instead of attempting to control the demand for housing in Canada’s urban centres, provinces and municipalities should use the tools they already have to ensure that regulations allow for timely construction of new housing to meet pent-up demand. Simply put, allow supply to react to demand.