Researchers Benjamin Strauss, St\u00e9phane Surprenant and Kerem Tuzcuoglu found that home sales rise relatively quickly following a rate cut, while the response from new construction takes considerably longer. Home prices, meanwhile, increase persistently.<\/p>\n
Because demand responds more strongly than supply, the researchers concluded that monetary policy cannot resolve housing shortages and may worsen affordability pressures when the labour market is strong.<\/p>\n
\u201cWhile monetary policy cuts can generate an increase in housing supply, these effects are dominated by the increase in demand in all specifications of the model,\u201d they wrote.<\/p>\n
Home sales respond well before construction<\/p>\n
Home resales begin rising shortly after an unexpected reduction in the policy rate, according to the study. The initial increase is temporary, with the largest effects appearing roughly 18 to 24 months later.<\/p>\n
Housing starts also increase, but not until around two years after the rate cut. The researchers attributed the delay to the time required to plan projects, obtain permits and begin construction, particularly for multi-unit buildings.<\/p>\n
Lower rates can reduce builders\u2019 financing costs, while stronger demand, higher expected selling prices and improved pre-sale activity may also encourage construction. However, the resulting increase in supply is not large enough to offset the stronger demand response.<\/p>\n The researchers said policies aimed directly at increasing supply may therefore be more effective than monetary policy at reducing housing-market imbalances.<\/p>\n Rate cuts have a larger effect when unemployment is low<\/p>\n The study found that lower rates have a significantly larger effect on home sales, construction and prices when unemployment is relatively low.<\/p>\n The researchers defined a high-unemployment environment as one in which the unemployment-rate gap exceeded 0.78 percentage points\u2014equivalent to a national unemployment rate of roughly 7% based on current estimates.<\/p>\n Canada\u2019s unemployment rate was 6.4% in July<\/a>, below the study\u2019s roughly 7% threshold, although the researchers did not estimate how a rate cut would affect the market under current conditions.<\/p>\n When unemployment was high, rate cuts had little effect on housing demand and a more muted effect on prices. The researchers said households may be more reluctant to make a major purchase or take on mortgage debt when unemployment is elevated, even if borrowing costs decline. Lenders may also tighten credit conditions, while fewer prospective buyers may qualify for a mortgage.<\/p>\n The analysis used Canadian housing and economic data ending in 2019, meaning it does not capture the pandemic housing boom or the sharp swings in interest rates that followed. It estimated the effects of an unexpected 25-basis-point policy-rate move, and the authors cautioned against applying the findings to larger rate changes or placing too much weight on the precise estimates.<\/p>\n Visited 1 times, 1 visit(s) today<\/p>\n Bank of Canada<\/a> bank of canada research<\/a> BoC<\/a> BoC research<\/a> housing supply<\/a> monetary policy<\/a> research report<\/a><\/p>\n Last modified: August 20, 2026<\/p>\n","protected":false},"excerpt":{"rendered":"Rate cuts can fuel homebuying demand much faster than new construction, pushing prices higher rather than easing affordability…\n","protected":false},"author":2,"featured_media":865508,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[45,49,48,46],"class_list":["post-865507","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-ca","tag-canada","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/865507","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=865507"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/865507\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/865508"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=865507"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=865507"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=865507"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/www.newsbeep.com\/ca\/wp-content\/uploads\/2026\/08\/How-Do-Interest-Rates-Spur-the-Housing-Market-Exploring-Nonlinear-Effects-sap2026-35.pdf.png\")
<\/a>Source: Bank of Canada<\/p>\n