Business·Analysis

Bank of Canada says housing affordability is about boosting supply, not lowering interest rates

As inflation comes under control, there is a growing chorus calling on the central bank to cut interest rates, easing at least some affordability issues. But Bank of Canada governor Tiff Macklem says a lower interest rate isn't the silver bullet people are hoping for.

Monetary policy can’t do everything, central bank governor Tiff Macklem says

Peter Armstrong · CBC News(Christopher Katsarov/The Canadian Press)

The Canada Mortgage and Housing Corporation (CMHC) surveyed developers constructing purpose-built rentals last fall. Three main concerns were raised: significantly higher construction costs, development fees and higher lending rates.

"More restrictive financial conditions have limited the flow of private investments into new purpose-built rental housing, resulting in a decrease of planned projects and further fuelling the affordability crisis," the CMHC report said.

A balancing act

Macklem said everyone — from prospective homeowners to developers to policy-makers — wants the same thing.

"It's very clear. The solution to housing affordability is to get supply up," he said.

But while supply and demand are out of whack, Macklem said the Bank of Canada can only do so much. And, he said, central banks really have only one tool to use.

WATCH | Canada's housing market expected to remain soft for now:

Soft housing market expected for 1st half of 2024, but only in some parts

1 month agoDuration 2:03The Canadian housing market is expected to remain soft at least for the first part of 2024 while interest rates remain high. But some parts of the country will see busy markets as investors look for lower prices outside of Toronto and Vancouver, forecasters say.

"The impact of raising the policy rate is actually to bring the housing market into better balance, not by reducing supply but by reducing demand and bringing it more in line with supply," he said.

Balance is something that has been lacking from the Canadian housing market for many years.

The good news is that most economists believe the Bank of Canada is going to start cutting interest rates this summer. That should provide some relief to developers worried about financing their next project and to homeowners struggling with significantly higher mortgage payments.

• B.C. continues to lead the country in high rental prices and low vacancies, CMHC data shows

• Linking immigration to the housing shortage may be missing the problem, experts say

But some believe the mere anticipation of changes to the central bank's key overnight lending rate may lead to a flood of pent-up activity in housing sales.

"Data from late 2023 and early 2024 suggests the housing market could very well be revving up again as lower bond yields and mortgage rates and more favourable prices [mean] more buyers jumping off the sidelines to front-run expected future rate cuts," wrote Bryan Yu, chief economist with Central 1 Credit Union in Vancouver.

If that's the case, affordability will only get worse as construction slowed, even while the pool of potential buyers swelled — with Canada experiencing record levels of immigration last year.

WATCH | Bank of Canada governor Tiff Macklem speaks in Montreal:

ABOUT THE AUTHOR

Peter Armstrong

Senior Business reporter for CBC News. A former host of On the Money and World Report on CBC Radio, Peter Armstrong has been a foreign correspondent and parliamentary reporter for CBC. Subscribe to Peter's newsletter here: cbc.ca/mindyourbusiness Twitter: @armstrongcbc

CBC's Journalistic Standards and Practices|About CBC Some mortgage rates are dropping, but renewed loans could keep economy slow

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