Bank of Canada Study Warns Rate Cuts Mostly Create Demand, Not Supply

Canada’s real estate industry often argues the central bank should ignore shelter inflation and keep rates low to boost supply. A new Bank of Canada (BoC) staff paper tests both claims, and neither holds up as a blanket rule. The researchers find that ignoring shelter inflation during a demand-driven boom is destabilizing to the economy and pushes valuations higher. While rate cuts get more homes built, roughly 80% of that comes from excess demand created by monetary stimulus. Housing FOMO Makes Ignoring Shelter Inflation Risky Can the central bank safely ignore shelter inflation? Not when demand is driving it, according to the researchers. “Monetary policy should not look through shelter inflation when it is driven by housing demand shocks. Looking through creates a more volatile economy especially when faced with extrapolative expectations,” they explain. Extrapolative expectations is a $10 term ($184.70 in 2026 dollars) for assuming a trend will continue. Home prices rise because that’s just what they do—so buyers who believe that load up on more housing and debt during a boom. The researchers modelled a boom where home prices climb 20% over two years. Excluding shelter inflatio...