Why We Can’t Deregulate Our Way to Affordable Housing

Housing debates today are dominated by one big idea: if we simply allow more homes to be built, affordability will improve. The logic seems straightforward — increase supply and prices should fall.

But what if the problem is more complicated than that?

That’s the central argument behind a recent paper by housing policy researcher Mike Fellman and economist J.W. Mason titled Fixing Housing Means Fixing Finance. In the paper, they argue that housing affordability is not just a land-use or zoning problem — it’s also a finance problem.

The traditional economic view assumes that developers will build more homes when regulations are loosened and prices are high enough. But Fellman argues that housing production is ultimately constrained by the financial system itself. Developers don’t build based on need; they build when projects generate returns high enough to satisfy lenders and investors.

This creates a paradox in housing markets. New housing projects often only become financially viable if developers expect rents and home prices to continue rising. In other words, the system frequently depends on ongoing unaffordability in order to produce new supply.

That doesn’t mean zoning reform and upzoning are unimportant. Fellman explicitly supports policies that make it easier to build housing. But his argument is that deregulation alone won’t solve affordability because the cost and structure of financing determine what actually gets built.

This is where the discussion becomes especially relevant for Canada.

In recent years, Canada has seen a boom in purpose-built rental construction tied largely to CMHC’s MLI Select program. Under the program, private lenders provide financing for rental housing projects while CMHC insures those loans, allowing developers to access lower borrowing costs, longer amortizations, and significantly higher leverage.

The key point is that Canada’s rental construction boom is not simply the result of zoning reform or stronger demand for rentals. It has been driven largely by cheap government-backed financing. In many markets, if MLI Select disappeared tomorrow, rental construction starts would likely collapse almost overnight because many projects simply would not be financially viable under conventional financing terms.

In many ways, this supports Fellman’s broader argument: housing supply is deeply influenced by the financial system and the availability of low-cost capital.

But it also raises important questions.

One critique I raised in my interview with Fellman is whether programs like MLI Select are simply burying weak affordability economics inside increasingly aggressive financing structures. Some projects today are only marginally cash-flow positive and rely heavily on 50-year amortizations and government-backed leverage rather than strong underlying rental income.

There’s also the question of concentration risk. If the vast majority of rental construction becomes dependent on a single federally backed financing program, the entire rental construction pipeline becomes vulnerable to policy changes. Tighten the terms of MLI Select and rental housing starts could fall sharply.

These are some of the tensions we unpacked in my interview with Mike Fellman, where we discussed why fixing housing affordability may ultimately require fixing housing finance itself.

John Pasalis is President of Realosophy Realty. A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).

Have questions about your own moves in the Toronto area as a buyer, seller, investor or renter? Book a no-obligation consult with John and his team at a Realosophy here: https://www.movesmartly.com/meetjohn

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