Rate Cuts Fuel Home Demand Over New Construction
Research from the Bank of Canada has found that rate cuts can fuel homebuying demand faster than new construction, leading to persistent price increases. The study examined how unexpected changes in monetary policy affect Canadian home sales, housing starts, and prices under different labour-market conditions.
The researchers discovered that home sales rise relatively quickly following a rate cut, while the response from new construction takes considerably longer. Home prices increase persistently as a result of the stronger demand response, which outweighs the increased supply.
The study found that rate cuts have a larger effect on home sales, construction, and prices when unemployment is low. In fact, when unemployment was high, rate cuts had little effect on housing demand and a more muted effect on prices.