House prices in Canada’s most desirable urban areas remain persistently high, and for years, headlines and government policies have focused almost exclusively on the demand side of the equation. In particular, relatively small pockets of demand (e.g. “non-resident speculators”) have presented a convenient scapegoat in attempts to determine why average income-earners are finding it increasingly difficult to live in Vancouver or Toronto. What such discussions tend to forget, however, is that the price of homes—like the price of anything—is determined by both demand and supply.

The Canada Mortgage and Housing Corporation (CMHC) recently released a lengthy report outlining major drivers of home prices in Canada’s largest metropolitan areas. Rather than focusing primarily on estimating the share of non-residents in housing markets, this report promotes a more balanced view.

On the demand side of the equation, the report mentions the significant impact of historically low interest rates. Indeed, recent work by the Fraser Institute identifies the amplifying effect of falling interest rates on mortgage borrowing power (the maximum mortgage loan potential homebuyers can qualify for). Between 2000 and 2016, average mortgage interest rates halved, meaning a family making the same monthly mortgage payment could qualify for 53 percent more mortgage. When combined with rising incomes over the same period, average earners saw their borrowing power double in Canada’s four largest metropolitan areas.

Faced with strong housing demand, an inadequate response on the supply side inevitably raises prices. CMHC makes clear that the pace at which new units have come onto the market in Toronto and Vancouver has been inadequate, unlike metro areas like Edmonton and Montreal. Here too, Fraser Institute research from the past four years provides important insights.

By surveying 273 homebuilders between 2014 and 2016, the Institute developed an index of residential land-use regulation, including measurements of how long it takes to obtain building permits, how much regulatory compliance costs, and the kind of opposition homebuilders face from local councils and community groups. This in turn allowed for closer analysis of the impact of regulation on housing supply. Perhaps unsurprisingly, long and uncertain approval timelines presented the strongest deterrent to new homebuilding.

Indeed, the CMHC evaluated our land-use index data and came to the same conclusion: “The results show statistically significant estimates for the effect of supply constraints as well as CMA dummies on increasing average prices.” In other words, supply constraints are impacting housing prices in Canada’s most expensive housing markets.

There’s still a long way to go before commonplace explanations for high home prices shift away from finger-pointing at subsets of demand, and towards a more balanced discussion about all sides of the price equation. Nevertheless, it’s encouraging to see an agency like CMHC wade into the debate with a more sensible approach. Ultimately, a better-informed discussion on this topic is the first step towards broad housing affordability in Canada’s hottest markets.