A recent Globe and Mail article highlighted Ontario Premier Kathleen Wynne’s concern regarding Toronto’s skyrocketing house prices. Indeed, the Canadian Real Estate Association reports a 117 per cent increase in home prices across the Greater Toronto Area since January 2005, providing ample cause for concern for potential homebuyers and renters alike.

It’s good that Premier Wynne seeks to better understand and address this issue. As her government analyzes potential causes of high home prices and weighs policy response options, the province should carefully consider how existing regulatory red tape influences housing prices. This red tape makes it costlier and more time consuming to build new homes, which predictably discourages their construction.

Recent work by the Fraser Institute takes a closer look at the gap between demand and supply in cities across Canada, including the GTA. It finds long and uncertain approval timelines for building permits, and costly fees and local opposition to new homes, slow the growth of housing stock. It also finds that less onerous regulation of homebuilding in the region’s most desirable neighbourhoods would have allowed for more density—a stated goal of the province—between 2006 and 2011 (see map below).

In other words, the government’s regulations make it harder to supply new homes to keep pace with demand. As Economics 101 tells us, a restriction in the quantity of a good supplied (in this case housing) will contribute to the price going up. And that’s exactly what’s happened in Toronto and the surrounding area.

Regulatory red tape is resulting in fewer new homes than there otherwise would be with a growing pool of buyers, contributing to rising prices. Removing some of these barriers would make it easier and more financially attractive to construct new homes, which would, over time, put downward pressure on housing prices.