Why isn't Canada's housing market responding to lower interest rates?
The Bank of Canada opted to maintain its policy interest rate at 2.75% in April, citing escalating trade tensions and widespread economic uncertainty. However, the decision has drawn renewed attention to Canada’s faltering housing market, which continues to cool despite recent interest rate cuts.
The central bank’s Governing Council deliberated against a backdrop of heightened volatility, triggered by a new wave of US-imposed tariffs on imports, effective April 2. These measures have disrupted financial markets, weakened consumer confidence, and cast doubt on near-term economic growth. The effects are being felt acutely in Canada’s housing sector, where activity has cooled significantly.
“Housing activity also slowed considerably in the first quarter of 2025,” the Council noted, highlighting that resale activity—especially in the Toronto market—declined even as borrowing costs dropped.
Rate cuts fail to ignite
Since mid-2024, the Bank has implemented a series of rate cuts to stimulate economic growth and maintain inflation near its 2% target. Although these measures have brought mortgage rates down, the intended boost to the housing market has yet to materialize. Consumer sentiment remains subdued, with surveys showing confidence at historic lows.
Governing Council members acknowledged that “lower interest rates pulled down mortgage interest costs and rental prices moderated,” but this easing has not been sufficient to offset broader economic pressures. Slowing household spending, cautious business investment, and weakening employment are contributing to a climate of uncertainty that has discouraged homebuying and slowed construction.
Analysts warn that if trade conflicts deepen—particularly under the Bank’s more severe illustrative scenario where tariffs become permanent—the housing sector could face greater strain. In such a scenario, inflation might temporarily rise above 3%, even as the economy enters recession. The report notes that “lower demand for Canadian exports could affect business investment, employment, household spending and housing more than anticipated.”
Divided on further action
Despite these risks, the Bank chose not to cut rates further at its April meeting. While some members favoured another 25-basis-point reduction to support sectors like housing, others argued that previous rate cuts were still working their way through the economy and that more data was needed before taking further action.
Looking ahead, the Bank said it would closely monitor the dynamics around Canadian exports, particularly how it impacts business investment, employment, and household spending, and how inflation expectations evolve. Should the outlook deteriorate, the Bank said it remains prepared to act.
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