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A year ago this week, this page began an editorial with a colloquial observation: “Canada’s housing market is bonkers.”

Since then, the stew of factors prompting that observation have only intensified. Low interest rates, escalating purchases by investors, and a general mania convinced the hot market will just get hotter have exacerbated the long-term lack of supply.

Today, bonkers is ever more so the right word to describe Canada’s housing market. The latest data show the MLS home price index climbed 3.5 per cent in February from January, the biggest-ever monthly gain. The index is up almost 30 per cent in a year – also a record.

A year ago, this page and others argued that interventions were necessary to dampen demand, something that had worked in the recent past.

In 2016-17, during the last housing mania that centred on Vancouver and Toronto, officials jumped in with new rules – from levies on empty homes, speculators and foreign buyers, to tighter mortgage requirements. The Bank of Canada, after stoking housing with lower interest rates in the mid-2010s, more than tripled its policy rate to 1.75 per cent by late 2018, up from 0.5 per cent in mid-2017.

It worked. Price growth slowed to a dribble.

Then came the pandemic, which first saw a stampede for detached homes. A widespread boom followed. This time, governments didn’t intervene and the Bank of Canada kept its finger off the interest-rate trigger (until this month), and now we have moved way past bonkers to something else.

This has led to a polarized debate around what’s the cause and what’s the solution. There are two camps. One cites supply and one points to demand. Both are correct.

Look at what two of the big banks are saying. Scotiabank says Canada has underbuilt for decades and has fewer homes compared with other Group of Seven countries. The Bank of Montreal says “we need to support supply” but argues “that’s like bringing a squirt gun to the raging inferno of demand.”

Both things are true. Solving the long-term supply shortage does not address the short-term mania. Housing starts in 2021 reached a high. That did not slow prices.

But long-term problems are not quickly resolved. No one is arguing that increasing supply is some sort of magic bullet; that a rewrite of ancient municipal zoning restrictions, which prevent densification and perpetuate scarcity, will suddenly make housing affordable.

And it is absolutely true that taking on demand – starting with interest rates – could make a difference now. But cooling demand doesn’t solve the central problem.

Sure, prices could fall. Say, as rates rise, prices drop 25 per cent this year. That’s a lot. Yet that only eliminates gains during the pandemic. The problem of housing prices being out of reach for many people existed before that.

The reality is Canada, and the Western world in general, created this bind over decades. The building of housing in cities has been too heavily restricted. Most land is reserved for the least density possible – the detached home.

Suburban sprawl is one result of that, and that’s bad for the economy. If people can’t afford to live in cities, where the economy is most productive, our collective gains are muted.

The demand argument, while valid, is too often wielded against an increase in density. Some have recently pointed to the 2021 census. In one example, the Toronto region’s population grew 4.6 per cent from 2016, but dwellings grew “more” at 7 per cent. What supply problem?

The actual math is this: The population rose by 274,000 people to 6.2 million while dwellings rose 159,000 to 2.39 million. The housing deficit remains.

The reality in the City of Toronto is that the population across many neighbourhoods has fallen by 220,000 over two decades, because of exclusionary zoning. That’s the opposite of what should happen.

Ontario last month published a landmark report on housing policy. It called for “immediate and sweeping reforms,” starting with allowing four units of housing with no prior approval on any city lot.

The province has yet to act. Yes, new zoning won’t solve the problems of today. And yes, demand is a serious factor. But it’s obvious that supply is the real, long-term issue. As Canada’s population rises, building more housing – a lot more – is the best answer.

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