Some people suggest that high interest rates will cure Canada’s housing affordability problem.

The reasoning goes: keep hiking rates and there will be less demand from buyers, and as a result, prices will fall and housing becomes affordable.

So, problem solved.

And indeed, the housing market appears to be reacting to the two rate hikes made so far this year by the Bank of Canada.

More increases are anticipated through 2022 and next year.

Demand has softened, as shown by declining sales in Greater Vancouver and the Fraser Valley and elsewhere in the country.

To cite an example, median prices are dropping on the east side of Vancouver.

Economists with CIBC Capital Markets have taken note of the current situation.

“Sales are falling fast, and prices will follow,” Benjamin Tal and Katherine Judge wrote in a report released Wednesday (May 11).

The speed and magnitude of future rate hikes will cause an “adjustment in the market”.

“However,” Tal and Judge continued, “the return to balanced conditions or even a buyers’ market will not cure what ails the Canadian housing market.”

They went on, “It will just ease the symptoms for a short period of time. In fact, if history is a guide, the slowing ahead might worsen the supply-demand mismatch in the market.”

Hence, a “more relaxed housing environment should not ease the urgency in which the chronic lack of housing supply in the Canadian market is dealt with”.

“After years of fighting supply issues using demand tools, governments at all levels finally recognize that over time, the housing affordability crisis will worsen without adequate supply policies,” Tal and Judge wrote.

The CIBC economists then went on to examine how future Canadian housing policy can succeed.

Tal and Judge argued that a policy that addresses supply may only achieve its purpose if it is based on the current assumption.

And here’s what they consider is the crux of the problem.

Tal and Judge claimed that housing demand is “grossly undercounted”.

By how much?

“Our conservative educated guess is that that number is close to 500,000 households,” the economists wrote.

They explained, “That is, official household numbers often used to estimate the demand in the market undercount the real demand for housing by about half a million households.”

If the assumptions are corrected, then it’s just a matter of setting a higher target for home construction, right?

Well, not so fast.

As Tal and Judge noted, the construction industry does not have the capacity to build faster.

The economists noted that there is “not enough consideration is given to the simple fact that the industry’s capacity to reach those elevated targets is questionable at best”.

“Our focus here is on one aspect of the issue: the rising cost and length of construction due to a lack of labour and trades,” Tal and Judge explained.

The CIBC economists noted that it now “takes twice as long to complete both low-rise and high-rise units today than it did two decades ago”.