How can Canada have a housing shortage while homes sit unsold?

What has changed is the current financial environment in which housing is bought and built. The recent period of higher interest rates sharply reduced purchasing power, while construction costs, financing costs, and regulatory charges remained elevated. This widened the gap between what households can afford to pay and what it costs to deliver new housing, particularly in well-located areas. There is no shortage of households that would purchase a modest, well-located home at a lower price point. If it were possible to deliver that housing at scale, it would sell quickly. The problem is that policy-driven costs make those price points extremely difficult to achieve. Development charges, HST, land transfer taxes, and regulatory friction all push prices higher and reduce liquidity, leaving many households unable to transact even when underlying demand is strong. Misaligned supply What emerges is not excess supply, but misaligned supply. The right kinds of homes are unavailable at prices the market can comfortably absorb, leaving many would-be buyers on the sidelines. This is what suppressed demand looks like. It doesn’t disappear; it accumulates. As financial conditions eventually improve, whether through lower interest rates, higher incomes, or both, that demand will return quickly. If housing construction continues at its slow pace in the meantime, the structural shortage will continue to worsen. This is why housing downturns matter so much for policy. In most jurisdictions, governments do not formally abandon supply reforms when markets soften. Approval timelines are still meant to improve, and fees are still under review. But the willingness to take political risk declines. This pattern is true at all three levels of government. As a prime example, during the last federal election, Mark Carney made housing a central plank of his platform, including commitments to reduce development charges and to reintroduce a MURB-style tax incentive to support rental construction. Since forming government, both measures have stalled, with little indication they remain a priority. Provincially, Doug Ford has openly criticized municipalities for high development charges, but has refused to expend the political capital required to correct the problem. CMHC has also chosen to slow its participation in the market for new rental construction. You’d think that as market conditions weaken, CMHC financing criteria should become simpler and more permissive to keep projects moving. Instead, they’ve opted for increasingly complex and restrictive criteria that are pushing many rental projects out of viability, even as the government continues to describe housing supply as a top priority. The effect of this policy drift is not immediately visible, but it is consequential. Projects are delayed or quietly abandoned. Fewer homes enter the pipeline at precisely the moment when we have an opportunity to address the decades-long structural shortage. Instead, government leaders will be tempted to opt for “quick-fix” policy solutions that misdiagnose the problem. Solving the problem The alternative is not to prop up demand through buyer subsidies or temporary incentives. The only durable response is to reduce the friction between demand and supply, particularly when market conditions are already suppressing activity. That means approvals that are predictable and timely, zoning that allows modest density as of right, and financing and tax policies that encourage responsible risk-taking and allow private capital to do more heavy lifting in housing delivery. It also means stripping away development charges, HST, and land transfer taxes that inflate costs, freeze mobility, and actively work against the efficient functioning of the housing market. Canada can experience a soft housing market and a housing shortage at the same time because these conditions reflect different dynamics operating on different timelines. Market cycles affect when people can transact. Policy choices determine whether supply is ready when they do. The danger is assuming that today’s cooling market is solving yesterday’s shortage. It isn’t. It’s simply postponing and likely worsening its consequences.