The Governor of the Bank of Canada (the central bank), Tiff Macklem, said that the bank cannot solve the housing crisis through interest rates because the root cause of the crisis is a shortage in the housing supply.

Macklem was speaking today before the Finance Committee in the House of Commons, eight days after the central bank's latest decision regarding the interest rate, in which it announced keeping the key interest rate at its level of 5%.

Members of the parliamentary committee raised many questions to the Governor of the Bank of Canada regarding housing affordability.

Macklem acknowledged that high interest rates contribute to rising housing costs, but he pointed out that inflation in housing prices remained high during times when interest rates were low as well as times when they were high.

High interest rates have led to an increase in the cost of obtaining or renewing a mortgage, and also caused higher costs for real estate developers to secure loans to build homes.

However, low interest rates also lead to higher housing costs by stimulating demand for housing. With people rushing to buy under low interest rates, housing prices rise.

Macklem said that the government should focus on increasing the housing supply to improve affordability, and warned that policies that increase demand only exacerbate the affordability situation.

It is worth mentioning that when the Bank of Canada announced keeping the key interest rate unchanged on January 24, it indicated that it had begun discussing the schedule to start reducing the interest rate.

Economists widely expect the bank to start cutting around the middle of this year.

However, the pace of inflation decline in the coming months may affect this schedule.

The Bank of Canada pointed out that the rapid rise in housing costs is the main reason why the inflation rate remains above its 2% target.

The total annual inflation rate in Canada reached 3.4% in December 2023, while housing prices rose by 6% year-over-year.

Rental housing prices in Canada rose during the past year amid supply constraints keeping pace with demand, leading to the lowest vacancy rate ever for rental homes (1.5%) since the Canada Mortgage and Housing Corporation (CMHC – SCHL), a federal institution, began issuing comparable data in 1988.