Canada is caught in a housing affordability bind: far too many Canadians are locked out of homeownership and face staggering rental costs, but rapidly boosting affordability will come with serious financial risks in its own right. Given the crisis we’re in, it’s a trade-off Ottawa must seriously consider.

Without emergency action, it’s difficult to envision how an industry that averaged 209,000 housing starts per year since 2000 will rapidly scale to the 430,000 annual starts the Canada Mortgage and Housing Corporation (CMHC) estimates are required to meet affordability targets by 2035. With stagnant supply growth, young Canadians are left facing massive hurdles to even rent the kind of home that would support building a family, let alone purchase one.

It’s a pressing issue, but governments face serious perils in seeking a quick remedy: significant, rapid housing affordability improvements risk economic and fiscal stability. That’s because the relaxed lending standards needed to spur more construction would make the financial system more vulnerable, and government loan guarantees or subsidized loan insurance would create large obligations on the already strained federal balance sheet.

Instead, housing affordability would ideally be restored through sustained increases in the supply of market housing—achieved through structural changes that reduce regulatory delay and uncertainty, and productivity improvements that lower construction costs. But these........

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