Bank of Canada Research Warns Rate Cuts Can Worsen Housing Affordability

A new independent staff study from Canada’s central bank aims to help clarify the impact of low rates on housing. Bank of Canada (BoC) researchers found that supply and demand both get a boost with rate cuts. Demand responds almost immediately, but supply follows nearly two years later. If affordability is the goal, monetary policy is the wrong tool, warns the researchers. BoC Finds Lower Rates Stimulate Demand Faster Than Supply Central banks lower interest rates to stimulate demand with cheaper short-term financing costs. The mechanics are straightforward: cheaper financing and more leverage help pull purchases forward. Since credit is made faster than supply chains can respond, it creates excess demand. That’s not an accident, it’s the goal—to create non-productive price growth, also called inflation. Housing is one of the best examples of this, as financing and long production times are a part of the industry. “Demand tends to respond more strongly than supply,” explain staff researchers. They note that cheaper financing stimulates sales quickly, boosting home prices. Strong labour markets amplify this trend, with households less cautious over savings and facing easier lending ...