The federal government would be better-served by encouraging the construction of new homes in Toronto and Vancouver, rather than trying to clamp down on foreign buyers in Canada's two white-hot real estate markets, according to an expert.

David Rosenberg, chief economist and strategist for Gluskin Sheff and Associates, said the federal government's attempts to cool Canada's hottest housing markets present a "social risk" to first-time homebuyers.

"You're pricing out a generation of young people," Rosenberg told the Business News Network on Tuesday. Rosenberg says the feds don't have a lot of options when it comes to restricting foreign investment in Toronto and Vancouver, which is suspected of driving up prices in those markets. Instead, Rosenberg suggests Finance Minister Bill Morneau and his staff should turn their attention to encouraging more new housing projects, so there will be more supply to meet demand.

"We continue to focus on the wrong area," Rosenberg said. "The focus has continually been on demand, not enough on supply." He pointed out that there are 30 per cent fewer building permits being approved for residential projects in Toronto and Vancouver over the last year, even as home prices continue to climb. And while higher prices are keeping first-time homebuyers down, they're doing little to discourage Chinese investors from entering the marketplace.

"These are inherently non-price-sensitive entities," Rosenberg said of the Chinese investors. "They're still buying as many units… as they were a year ago when prices were 30 per cent lower."

The federal government earmarked $500,000 for investigating the issue of foreign investment in Canada's real estate market in the last budget, but Rosenberg says that won't directly address the issue.

Rosenberg pointed out that Morneau has already "tinkered" with taxes for homebuyers, but that doesn't address the "underlying problem" of there being too few homes on the market. Rosenberg suggested the federal government should place more emphasis on zoning regulations, so it will be easier for new homes to be built.

Morneau spoke before the Senate on Tuesday, about the state of the housing markets in Toronto and Vancouver.

Last week, the Toronto Real Estate Board said that the city set a record with nearly 13,000 homes sold in May, even as the average price of a detached house reached $1.28 million in the city. The record numbers were recorded even after Morneau increased the amount required to put a down payment on a home over $500,000.

Prior to Morneau's appearance in the Senate, Rosenberg said there was "no question" he would be asked about a possible housing bubble.

"The next question is, what are you going to do about it?" Rosenberg said.

With files from the Business News Network