The housing affordability problem in Canada has long gone beyond the real estate market itself. According to Bank of Canada Senior Deputy Governor Carolyn Rogers, the central bank can influence demand through interest rates, but it cannot eliminate the housing shortage, speed up permitting, or change zoning rules. That requires decisions by federal, provincial, and municipal authorities.
Speaking to members of Victoria’s business community, Rogers spoke candidly about the limits of monetary policy—and why even well-designed regulatory measures have not been able to stop real estate prices from rising.
In brief
- Residential real estate has become a significantly more important part of the Canadian economy and bank lending.
- 53%, while incomes are up by about 13%.
- The mortgage stress test increased the resilience of the financial system, but on its own it did not stop prices from rising.
- Low interest rates can make mortgages more affordable, but at the same time they increase demand for housing.
- The Bank of Canada cannot directly increase the supply of houses and apartments: that requires decisions by other levels of government.
- In Rogers’s view, the long-term solution is tied to more construction, infrastructure, urban planning, and reducing the economy’s dependence on ever-rising home prices.
What happened?
Speaking to the Greater Victoria Chamber of Commerce and CFA Society Victoria, Carolyn Rogers highlighted one of the main problems in Canadian housing policy: the expectation that the central bank can single-handedly make housing affordable creates a false impression of what it can do.
Over 15 years working in financial regulation—in British Columbia, at the Office of the Superintendent of Financial Institutions, and in international banking organizations—Rogers has repeatedly encountered the same issue.
A regulator can reduce a specific risk, but that does not necessarily change the system itself.
And over recent decades, the Canadian economy has increasingly tied household wealth, financial stability, and housing prices together.
Why has housing become so important to the economy?
The numbers show how much the structure of the Canadian economy has changed.
In 2000, investment in residential real estate accounted for about 4.3% of Canada’s GDP. By comparison, business investment in equipment, machinery, and innovation reached roughly 8.3%.
Today, the ratio has changed significantly.
In addition, about half of all bank lending is now tied to residential real estate.
This means that swings in home and apartment prices affect far more than just buyers and sellers.
If prices rise sharply, it affects homeowners’ wealth, household debt burdens, the banking sector, and overall economic activity.
If the real estate market drops sharply, the consequences can also extend far beyond the housing sector.
What happened to prices and incomes?
The gap between housing costs and household incomes continues to widen.
From 2015 to 2025, home prices in Canada rose by about 53%, while incomes increased by approximately 13%.
This gap is one of the reasons why the issue of housing affordability today cannot be viewed solely through the lens of mortgage rates.
Even a cheaper mortgage does not solve the problem if real estate itself becomes unaffordable relative to incomes.
Did the mortgage stress test help?
The mortgage stress test was introduced in 2017, when Rogers was working at OSFI.
Its purpose was not to reduce housing costs, but to ensure that a borrower could service a mortgage even if interest rates rose.
During the subsequent rate-hike cycle, this measure helped create an additional buffer for borrowers and the financial system.
But it did not stop real estate prices from rising.
And here, Rogers says, an important feature of the housing problem becomes clear: measures that make the financial system safer do not necessarily make housing cheaper.
Why can’t the Bank of Canada simply cut rates?
The interest rate affects the economy as a whole, not just the real estate market.
When rates fall, mortgage payments can become more affordable, supporting demand for housing.
But if the supply of houses and apartments is limited, additional demand can intensify upward pressure on prices.
Rogers emphasizes that the Bank of Canada sets one interest rate for the entire economy.
It is impossible to set one rate specifically for homebuyers and another for businesses or consumers.
There is another limitation as well: an interest rate cannot directly build a new home.
It cannot change zoning, issue a building permit, or lay new infrastructure.
What did the pandemic show?
The pandemic became an especially vivid example.
Amid an unprecedented economic shock, the Bank of Canada cut its policy rate to 0.25% in an effort to support the economy.
At the same time, the combination of cheap borrowing, limited housing supply, and strong demand led to a rapid surge in prices.
Average home prices rose by about 50% in two years.
At the same time, Rogers stresses that it would be wrong to explain what happened solely by low interest rates.
But monetary policy, she says, also cannot fully absolve itself of responsibility for the consequences of its decisions.
What did the monetary policy review find?
As part of its five-year review of monetary policy, the Bank of Canada examined two important questions.
First: should the central bank respond more actively to rapid growth in home prices?
Second: does the official inflation measure accurately reflect Canadians’ real housing costs?
The Bank did not arrive at a simple answer to these questions.
On the one hand, excessive growth in housing costs creates serious economic risks.
On the other hand, using the interest rate to fight real estate prices affects the entire economy at the same time.
It creates a kind of dilemma: the tool exists, but it is too broad for one specific problem.
Why do inflation and housing costs create an additional problem?
There is another complication.
When interest rates rise, the costs for some mortgage holders increase. In turn, mortgage costs are included in calculations of the cost of living and inflation.
Thus, rate hikes intended to fight inflation can simultaneously increase some housing costs for households.
That is why, Rogers says, one of the Bank’s main tasks after the policy review is to better explain the trade-offs to Canadians and more clearly define the limits of what monetary policy can do.
What can really affect housing affordability?
In Rogers’s view, long-term improvement requires solutions in several directions at once.
We need more housing
The most obvious problem is supply.
If the number of people who want to buy or rent housing grows faster than the number of new houses and apartments, the market faces additional pressure.
We need infrastructure
New construction cannot be separated from roads, public transit, schools, water supply, and other elements of urban infrastructure.
Urban planning rules need to be revisited
Zoning and permitting procedures directly affect where and how quickly new housing can appear.
The economy needs less dependence on rising real estate values
Rogers also draws attention to a more fundamental issue: the Canadian economy is too tightly linked to ever-rising home values.
For a homeowner, a price increase means the value of their asset rises.
But for someone who has not yet bought property, that same increase means a higher barrier to entering the market.
It creates a paradox: what increases the wealth of current owners can simultaneously worsen the position of future buyers.
What happens next?
Solving the housing issue goes far beyond the Bank of Canada’s mandate.
The federal government is responsible for some housing and financial policy tools, provinces handle a significant share of planning and regulation issues, and municipalities directly influence zoning, permits, and urban infrastructure.
Therefore, according to Rogers’s approach, housing affordability cannot be restored with a single change in the interest rate.
Money can make a mortgage cheaper or more expensive. But it cannot, by itself, create new apartments and houses.
Frequently asked questions
Can the Bank of Canada lower home prices?
It can influence demand through interest rates, but it cannot directly regulate housing supply.
Why can low rates both help and hurt buyers at the same time?
Cheaper credit reduces the cost of financing, but it can also increase demand. With limited supply, this can create additional upward pressure on prices.
Why was the mortgage stress test introduced?
To test borrowers’ ability to service a mortgage at higher rates and to increase the resilience of the financial system.
Why is rising home prices important for the whole economy?
Real estate makes up a significant share of bank lending and family wealth. Therefore, changes in the housing market can affect consumption, debt, the banking system, and economic activity.
Who can solve the housing shortage problem?
It requires measures at the federal, provincial, and municipal levels—from infrastructure funding to urban planning rules and faster construction.
Unique commentary
The story of recent years shows how difficult it is to solve the housing problem with a single tool.
High rates make mortgages harder for those who are already paying off a loan or are just about to take one out. Low rates make financing easier, but with insufficient supply they can simultaneously boost demand. Mortgage regulation increases the resilience of the banking system, but by itself it does not create new homes.
That is why the main question is gradually shifting from the cost of money to the amount of housing.
As long as real estate values are one of the main sources of wealth for Canadian families, falling prices can create financial risks. But constant price growth simultaneously pushes the market further away from those who have not yet become owners.
This is the core paradox of the Canadian real estate market: housing is simultaneously a home, an investment asset, collateral for banks, and an important part of the national economy.
And that means making it more affordable using only the interest rate is truly impossible.
