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A sold sign hangs in front of a home on Sullivan St. in Toronto's Chinatown.

Fred Lum/The Globe and Mail

Toronto is in the midst of a housing heat wave, with sales activity and prices both breaking new records in July. But one thing that seems capable of putting the brakes on the market is what the Toronto Real Estate Board has called the "troubling trend" of a shrinking supply of homes for sale, particularly detached homes.

Several new reports out Monday point to just how much the lack of supply – particularly of detached houses, townhouses and other so-called "ground-oriented" housing – has helped drive the region's house prices into the stratosphere.

Frank Clayton, senior research fellow at Ryerson University's Centre for Urban Research and Land Development, examined a handful of recent surveys of consumer housing preferences in the Greater Toronto Area (GTA). He found that despite provincial policies that have encouraged a dramatic shift toward building condos rather than houses, most prospective buyers in the region say they prefer a detached house or other low-rise properties, such as townhouses.

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RELATED: Soaring Victoria and Toronto home prices led red-hot July market

Millennial home buyers prefer condos in slightly higher numbers, but most also say they are looking to purchase a low-rise house, according to Mr. Clayton's research.

House sales numbers back up his research. Low-rise houses made up 66 per cent of all homes sold in the region last year, compared to 34 per cent for condos. Detached resale home prices grew 12 per cent last year, even as resale condo prices rose just 5 per cent.

"Many households demand a single-detached house with a yard as their preferred abode," Mr. Clayton wrote, warning that to restrict the supply of low-rise housing and encourage more high-rise condo construction "will lead to even higher house prices … and huge capital gain windfalls for the lucky owners of existing houses and vacant lands on which new ground-related homes could be built."

Detached and semi-detached properties made up less than 27 per cent of new housing starts in the GTA last year, down from nearly 40 per cent in 2009, CIBC World Markets deputy chief economist Benjamin Tal and researcher Katherine Judge point out in a separate report.

INTERACTIVE: Hot summer for Canadian housing market. See how your city and neighbourhood compare

While new home construction has picked up steam in Ontario this year, much of the growth has come outside of the GTA, in communities such as Hamilton, St. Catharines and London, says Bank of Nova Scotia senior economist Adrienne Warren.

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Both Mr. Clayton and the CIBC economists point the finger at provincial policies aimed at curbing urban sprawl that have restricted the amount of new land available for low-density housing developments and driven up the costs of building new houses. The Ontario government recently proposed even higher density targets for municipalities, which will also add to the shortage of land for detached homes, the CIBC economists say.

At the same time, extended low interest rates have created an "affordability mirage" that has only fuelled demand, enabling more people to stretch themselves financially to buy into the GTA housing market, even in the face of skyrocketing prices.

With little room for new supply of low-rise housing, Mr. Tal and Ms. Judge suggest that financial regulators instead continue to target demand by tightening mortgage lending standards even further. They propose increasing the qualifying rate for borrowers who take on five-year, fixed-rate mortgages. Ottawa should also raise the minimum down payment on insured mortgages between $500,000 and $1-million above the current 10 per cent. Furthermore, regulators should keep a closer eye on the private mortgage industry that targets subprime borrowers, which the economists say has increased its share of the mortgage market to 6 per cent.

RELATED: Find out how long it will take you to save for a down payment here.

They also argue that Toronto should be active about stemming the tide of foreign money into the region's housing market, which they estimate accounts for as much as 15 per cent of home sales, including locals who get money from family members abroad to buy homes. The CIBC economists propose a "flipping tax" on foreigners looking to speculate on GTA home prices, a tax on empty units and higher land transfer taxes for more expensive properties. Governments could also enact rules limiting international buyers to purchasing only newly built homes, similar to Australia.

But the most important changes will come from policies that encourage more people to rent instead of buy, Mr. Tal and Ms. Judge said. Too few people are opting to rent in Toronto's increasingly expensive housing market, they said. A shift toward renting will be critical in easing Toronto's affordability woes and preventing a house price correction when interest rates eventually rise.

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"While we all hear about the tight rental market in the GTA, the reality is that the propensity to rent in the GTA did not rise in recent years in a way that is consistent with the rapid pace of house price appreciation," they wrote.

The economists called on municipalities to provide more tax incentives to new rental housing developments, lower development charges for new rental buildings and find ways to encourage developers to build larger, family-friendly rental units.

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