Bank of Canada rate cuts save housing market from collapse, says economist

The Bank of Canada’s recent interest rate cuts may have averted what could have been a catastrophic collapse in the housing market, but they are unlikely to reignite the levels of market activity seen in previous years, according to CoStar Group chief economist Carl Gomez.

“I think the housing market just chugs along, basically the rate cuts are rescuing it from implosion, but it’s not necessarily going to take off again,” Gomez told the Financial Post. He explained that while mortgage rates have dipped slightly, they remain far higher than the historically low levels that fuelled previous housing booms.

“So the housing market will get revived but it’s not going to blow up again like it did before,” Gomez said.

Canadian fixed mortgage rates are largely influenced by bond yields rather than directly by the Bank of Canada’s policy rate. Long-term bond yields, including the Government of Canada 10-year bond yield, have stayed around 3.5%, even as the central bank’s policy rate dropped to 3.75% after four consecutive cuts this year.

US bond yields, which also influence Canadian rates, have risen since Donald Trump’s re-election, signalling higher inflation expectations and renewed economic activity. As a result, mortgage rates remain elevated, keeping a lid on affordability and housing market growth.

“Even though the Bank of Canada has been cutting interest rates, the long-term bond yields that determine the market have remained around that 3%,” Gomez added.

The Canadian economy faces deeper challenges beyond interest rates. According to CoStar’s 2025 outlook, the economy is growing well below its potential output. When adjusted for population growth, per capita GDP has been declining since 2023, signalling a recession.

“When we adjust GDP growth by population, unfortunately, we have been in a recession for almost two years now,” Gomez said. “If you look at per capita GDP growth adjusted for population growth — the outsized population growth since about 2023 — we’ve been declining.”

Gomez forecasted modest economic growth of 1.4% in 2025 but warned that risks such as trade disruptions from US policies and Canada’s recent immigration cuts could shave up to a full percentage point from growth.

This economic fragility is reflected in consumer behaviour. Households remained cautious, prioritizing financial security overspending, a mindset Gomez described as a “bunker” mentality. Given that consumer spending accounted for 60% to 70% of the economy, this hesitation could slow recovery even as interest rates decline.

The mortgage renewal cycle, once a significant risk, has eased slightly thanks to the Bank of Canada’s rate cuts. However, risks tied to unemployment and household finances persist.

“So there is still going to be an impact there, even as rates move down and we move away from a cliff,” Gomez said.

Inflation, another key factor, has entered a deflationary phase when shelter costs are excluded, with the consumer price index showing an inflation rate of just 0.85%. Gomez argued that the Bank of Canada should act decisively to lower rates further, potentially to a neutral level of 2.5%.

“If anything, with inflation at target, the policy rate should be more at a neutral level,” he said in the interview. “That’s why I still think there is an onus for them to be cutting, and they probably should be front-loading their cuts right now, for risk of what could happen to the economy if you fall behind the curve.”

Source: Canadian Mortgage Professional