Eigen RadarEconomics
Archive
Analysis

Canada’s housing squeeze exceeds what interest rates can fix

Carolyn Rogers argued that interest rates cannot directly restore housing affordability: they affect demand throughout the economy while leaving construction, zoning and permits outside the central bank’s control. The Bank of Canada’s framework review also found trade-offs in measuring shelter inflation. Her speech tied those limits to households’ heavy mortgage exposure and the economy’s dependence on housing wealth.

Economics & Markets··Morning
A Canadian flag flies along a street of wood-sided homes.

Interest rates cannot build homes

Carolyn Rogers, the Bank of Canada’s senior deputy governor, told a business audience in Victoria, in western Canada, on 1 October that interest rates are too blunt to target housing affordability directly. Monetary policy influences housing demand but cannot build homes, change zoning or speed up permits.[1], [2]

Rogers described the opposing effects of rate changes. Higher rates make credit more expensive and slow spending across the economy, while also making mortgage qualification harder. Rate cuts reduce borrowing costs, but stronger demand can lift house prices when supply is constrained.[1]

Housing wealth reaches deep into bank lending

Mortgages are households’ largest borrowing category, and approximately half of bank lending is tied to residential property. Rogers said falling home prices can weaken owners’ wealth, spending and construction activity. During two pandemic years, average house prices rose about 50 per cent. Mortgage stress tests and capital measures strengthened financial resilience, she argued, while affordability continued to deteriorate.[1]

Mortgage interest complicates the inflation measure

The central bank’s framework review also examined shelter inflation. Canada’s consumer price index includes homeowners’ property taxes, insurance, maintenance and mortgage interest. The home purchase price is treated as an asset price. Raising rates can therefore temporarily increase the mortgage-interest component while restraining wider inflation. Rogers said alternative measures also involve trade-offs and defended stable inflation as the bank’s main contribution.[1]

For more information on this topic, you can read the related columns.

References

  1. News sourceBank of CanadaBank of Canada explains the limits of rates in housing affordability↩1↩2↩3↩4
  2. News sourceCanada News MediaCanada’s housing squeeze exceeds what interest rates can fix↩
Central banks and the rate cycleEnergy transition and climate

More analysis from this desk

View all Brief analyses from the Economics & Markets desk →