BoC researchers find monetary policy "unable to alleviate housing affordability pressures"
Cutting interest rates may do more to inflame Canada's housing affordability crisis than resolve it, according to new research from the Bank of Canada.
The staff analytical paper, published August 20, by Bank of Canada researchers Benjamin Strauss, Stéphane Surprenant, and Kerem Tuzcuoglu of the Canadian Economic Analysis Department, examines how unexpected shifts in monetary policy affect home sales, housing starts, and prices across different labour-market conditions.
Using Canadian housing and economic data from January 1988 to December 2019 — sourced from the Canada Mortgage and Housing Corporation (CMHC) and the Canadian Real Estate Association (CREA) — the researchers found a consistent and troubling asymmetry: demand responds to rate cuts far faster than supply.
"Easing boosts resales quickly, raises housing starts with a delay, and increases house prices persistently," the researchers wrote.
"Because demand tends to respond more strongly than supply, monetary policy appears unable to alleviate housing affordability pressures and may instead intensify them when labour market conditions are strong."
Demand outpaces supply every time
The mechanics the paper describes are straightforward. Home resales begin rising shortly after an unexpected 25-basis-point policy-rate reduction, with the largest effects appearing roughly 18 to 24 months later.
New construction takes considerably longer to respond — housing starts do not pick up until approximately two years after the cut — owing to the time required to plan projects, secure permits, and break ground, particularly for multi-unit buildings.
Even when construction does eventually respond, it is not enough to offset the stronger demand impulse.
"While monetary policy cuts can generate an increase in housing supply, these effects are dominated by the increase in demand in all specifications of the model," the researchers wrote.
The paper adds that any supply boost that does materialise is likely tied to anticipated future demand rather than a genuine correction of the underlying imbalance, which limits its ability to close the gap between buyers and available homes.
The researchers were direct about what this means for policy.
"Insofar as monetary policy influences housing demand more strongly than housing supply, it has a limited ability to address housing affordability," they wrote.
"This conclusion holds even more strongly when unemployment is low."
Fern Glowinsky of Haventree Bank believes the Bank of Canada is likely to hold rates steady in September, while encouraging borrowers to explore their options as economic and housing market conditions continue to improve.https://t.co/QRWQ3Xwn95
— Canadian Mortgage Professional Magazine (@CMPmagazine) August 20, 2026
The unemployment threshold that changes everything
The paper introduces a critical variable: the state of the labour market at the time of a rate cut. The researchers found that monetary policy has a "larger effect on home sales, construction and prices when unemployment is relatively low," defining a high-unemployment environment as one where the unemployment-rate gap exceeds 0.78 percentage points — equivalent to a national unemployment rate of roughly 7%.
When unemployment is elevated, the transmission mechanism breaks down. "When the unemployment rate is high, consumers may look through lower-than-expected interest rates because they prefer to maintain elevated savings buffers in case of job loss or because broader economic fears are more pronounced in such periods," the researchers explained.
They also noted that "financial institutions are likely to tighten lending when the labour market is poor," while "mortgages often require an ongoing income stream and when a larger share of the labour force is unemployed this restricts the number of individuals who will qualify for a mortgage."
Canada's unemployment rate stood at 6.4% as of July 2025, according to the paper. That's below the study's roughly 7% threshold, though the researchers did not make explicit projections about current market conditions. The pattern held across nearly all regions of Canada examined, including British Columbia, Ontario, Québec, the Prairies, and the Atlantic provinces.
The researchers cautioned against extrapolating results to larger rate moves, noting their model was calibrated for a 25-basis-point shock.
"We would also caution against extrapolating the effects we estimated to larger shocks or reading too much into the precise magnitudes of the point estimates," they wrote.
The researchers' conclusion points in one clear direction: "policies aimed directly at increasing supply may therefore be more effective than monetary policy at reducing housing-market imbalances."
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