Canada’s housing affordability crisis is being driven primarily by restrictive municipal rules that limit how much new housing can be built, according to a new analysis from the Macdonald-Laurier Institute. The report argues that federal incentive programs alone will not be enough to fix the problem unless local governments are pushed to remove barriers to construction.
The analysis, authored by Anthony De Luca-Baratta, contends that Canada’s housing shortage stems from a web of municipal restrictions including density limits, zoning rules, high development fees, and constraints on building height, size and materials. These rules add costs that builders pass on to buyers and renters, the report says, constraining the supply of new homes and pushing prices higher.
What the Data Shows
Citing research from the Canada Mortgage and Housing Corporation’s Municipal Land Use and Regulation Index, the report notes that for every 10 percent increase in regulatory restrictiveness in a city, home price growth accelerates by 14 percent while supply growth slows. The index measures factors such as development fees, approval timelines and the complexity of local planning rules.
The report also points to research from the C.D. Howe Institute comparing home sale prices to construction costs as another way of measuring the impact of regulation. According to that research, a single-detached home in Toronto sells for roughly $350,000 more than it costs to build, even after accounting for a reasonable profit margin. In British Columbia municipalities including Abbotsford-Mission, Kelowna and Victoria, the gap between construction cost and sale price ranges from $255,000 to $415,000. In Vancouver, the report says that gap reaches $1.3 million.
Home Prices Have Far Outpaced Inflation
The report notes that the average Canadian home price rose from $163,524 in 2000 to $718,400 in 2025, an increase of 339 percent. Over the same period, general inflation rose by only 55 percent, meaning that even wages that kept perfect pace with inflation would not have come close to matching the rise in housing costs. The report states that nine in ten Canadians say they are worried about the state of the country’s housing market.
Housing Cost Gaps and Price Growth in Canada
Local Political Incentives Cited as a Barrier
Beyond the direct costs of regulation, the report argues that municipal governments face political and fiscal incentives that discourage them from loosening development rules. It points to the “Homevoter Hypothesis,” a concept associated with researcher William Fischel, which holds that homeowners are more likely than others to get involved in local politics specifically to protect the value of their properties. The report cites a 2014 paper by researchers Michael McGregor and Zachary Spicer as supporting evidence for this dynamic.
The report argues that the federal government, under the Carney administration, has taken some steps to encourage municipalities to reduce housing red tape but says Ottawa’s overall housing strategy remains too reliant on direct federal funding and control rather than incentives aimed at changing municipal behaviour. The report recommends that Ottawa rely more heavily on incentive-based approaches to encourage municipalities to increase housing supply, warning that home prices will continue to rise if the current approach does not change.
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