Rate Cuts Fuel Canada's Housing Crisis: Bank of Canada Research

New research from the Bank of Canada suggests that rate cuts may be exacerbating Canada's housing crisis rather than resolving it.

The study, published August 20, examined how unexpected shifts in monetary policy affect home sales, construction, and prices across different labor-market conditions. The researchers found a consistent pattern: demand responds to rate cuts much faster than supply.

According to the study, an unexpected 25-basis-point policy-rate reduction boosts resales quickly, raises housing starts with a delay, and increases house prices persistently. However, even when construction does eventually respond, it is not enough to offset the stronger demand impulse.

The researchers noted that monetary policy has a larger effect on home sales, construction, and prices when unemployment is relatively low. The study defined 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%. Canada's unemployment rate stood at 6.4% as of July 2025.

The researchers concluded that policies aimed directly at increasing supply may be more effective than monetary policy at reducing housing-market imbalances.