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Decisions by the Bank of Canada have worsened the housing crisis. It needs to start cutting interest rates on June 5

David MacdonaldAfter two years of higher interest rates in a mission to tackle inflation, the Bank of Canada has managed to make Canada’s housing affordability crisis even worse. It now has a chance to reverse the damage it is doing.

The next Bank of Canada interest rate decision is set for June 5. If we don’t see a return to lower interest rates then, I have no idea what we’re waiting for.

The latest figures put inflation at 2.7 percent, which is below the top end of the Bank of Canada’s one to three percent range. That inflation rate has been steady for four months running, meaning that prices of things like groceries are still rising, just in a more normal way.

So, it’s time to reverse the damage that high interest rates are doing. Right now, the main driver of inflation is high interest rates, which cause outrageous rent and mortgage interest costs. If you removed just those two costs from the consumer price index, inflation would be 1.5 percent – well below the bank’s general target.

bank of canada interest rates

Photo by Matt Artz

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It’s very unusual for just two cost sources to skew the consumer price index so substantially, but that’s where we’re at. If you exclude rent and mortgage costs, the inflation index has been under three percent since May last year.

That means the Bank of Canada – according to its own inflation limit calculations  – could have started reducing interest rates a year ago. Truly, an interest rate cut is well past due.

Mortgage interest costs are directly tied to the Bank of Canada’s headline interest rate; the same goes for rents. Rental building owners have mortgages, too, and they almost always buy properties on credit to maximize profits. So when interest rates rise, they pass those increases on to tenants through higher rents. High interest rates damage family budgets as they renew mortgages and lock in rents at much higher levels. This happens without benefiting the economy in any meaningful way.

Out of all the sources of inflation, mortgage and rent costs are the ones the Bank of Canada can directly control. The Bank of Canada had no control over the huge increases in gas prices in 2022, nor could it manage the supply chain issues following the pandemic shutdowns, which were the big drivers of inflation in 2022.

Those two problems are well behind us.

The idea behind interest rate increases is that they slow economic growth, but this doesn’t happen evenly in all sectors. Gas prices and supply chains are entirely unaffected by higher rates, but new residential housing is very sensitive to interest rate changes. You jack up interest rates to squash economic growth by tanking new housing starts. If you do this in a country like Canada, which has the highest relative household debt in the G7, you can do long-term damage.

It’s already reducing the number of homes being built in Canada. Interest rates hit developers hard, causing bankruptcies and less investment in new homes.

High interest rates can also make new developments too expensive for developers, especially as real estate sales volumes decline, which is Canada’s reality.

To some degree, this problem is being offset by federal government programs aimed at building more houses. Construction on multi-unit dwellings, for instance, is holding steady. But higher rates are doing long-term damage to our desperate need for more housing to be built.

So, we need the Bank of Canada to do its part. It has every reason to do so by lowering interest rates, beginning on June 5.

David Macdonald is a senior economist with the Canadian Centre for Policy Alternatives.

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