Rate cuts may be making Canada’s housing crisis worse
Fern Glowinsky of Haventree Bank believes the Bank of Canada is likely to hold rates steady in September, while encouraging borrowers to explore their options as economic and housing market conditions continue to improve.https://t.co/QRWQ3Xwn95
— Canadian Mortgage Professional Magazine (@CMPmagazine) August 20, 2026
The unemployment threshold that changes everything
The paper introduces a critical variable: the state of the labour market at the time of a rate cut. The researchers found that monetary policy has a “larger effect on home sales, construction and prices when unemployment is relatively low,” defining 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%.
When unemployment is elevated, the transmission mechanism breaks down. “When the unemployment rate is high, consumers may look through lower-than-expected interest rates because they prefer to maintain elevated savings buffers in case of job loss or because broader economic fears are more pronounced in such periods,” the researchers explained.
They also noted that “financial institutions are likely to tighten lending when the labour market is poor,” while “mortgages often require an ongoing income stream and when a larger share of the labour force is unemployed this restricts the number of individuals who will qualify for a mortgage.”
Canada’s unemployment rate stood at 6.4% as of July 2025, according to the paper. That’s below the study’s roughly 7% threshold, though the researchers did not make explicit projections about current market conditions. The pattern held across nearly all regions of Canada examined, including British Columbia, Ontario, Québec, the Prairies, and the Atlantic provinces.
The researchers cautioned against extrapolating results to larger rate moves, noting their model was calibrated for a 25-basis-point shock.
