High interest rates aren’t to blame for housing crisis, Bank of Canada governor says

Bank of Canada governor Tiff Macklem says the central bank can’t solve the housing crisis with interest rates because the root cause is a supply shortage.

Macklem faced multiple questions on housing affordability during an appearance before the finance committee on Thursday — one week after the bank yet again kept its key overnight interest rate at five per cent.

“Tightness in some parts of the economy,” most notably housing, he told MPs in his opening remarks, “is continuing to hold inflation up.” 

But, he said, housing inflation has been high both during times of low and high interest rates.

He says the government should be focused on increasing housing supply to improve affordability, and warns policies that increase demand will worsen it.

“Spending that really stimulates demand — at a time when we’re trying to let supply catch up with demand and relieve inflationary pressures — would be particularly problematic,” he said during the question period.

“If you look at the actual construction of houses, time to completion has been going up,” due partly to regulations and industry practices, he added later. 

Last week, the Bank of Canada continued to hold its key interest rate at five per cent — it hasn’t changed since July — and signalled it has begun considering the timeline for rate cuts.

Lowering the rate would bring some relief to homeowners with variable-rate mortgages. Macklem has said previously that, despite rising rent and mortgage interest costs, persistent inflation prevents him from cutting interest rates in the short term. 

Macklem reiterated on Thursday that the central’s banks discussions are “shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance” of five per cent.

The bank has also singled out rapidly rising housing costs as the primary reason why inflation is still above the two per cent target.