Canadian Real Estate Affordability Improves When Rates Rise, Despite The Rhetoric

Canada has seen a surge in real estate buyers looking to get ahead of rising rates. After all, a higher cost of borrowing means higher payments, right? Running TransUnion mortgage payment data against mortgage rates shows the exact opposite. This is due to the basic design of interest rates, which are increasingly ignored due to politics.

Canadian Mortgage Payments Have Soared Over The Past 5-Years

Despite falling mortgage rates, Canadian homebuyers have seen their mortgage payments soar. TransUnion data shows the average new mortgage payment reached $1,621 in Q3 2021, up 11.7% from a year before. Over the past 5 years, the average payment has increased 20% despite a sharp drop in the cost of interest. More than half of the growth for mortgage payments results from the past 12 months. Wild, eh?  

Canadian Mortgage Interest Costs Just Keep Dropping 

Let’s see how mortgage rates have been moving over this period. The average rate for new mortgages fell to 2.1% in Q3 2021, down 11.3% from last year. They have dropped about 23.6% over the past 5 years. Already looking pretty close, but let’s examine the relationship even further.  

Canadian Residential Real Estate Costs and Mortgage Rates

The annual percent change for mortgage interest costs, average mortgage payment, and home prices in the third quarter of each year. 

Source: TransUnion; Bank of Canada; CREA; Better Dwelling.

Cheap Mortgages Led To Higher Payments For Home Buyers 

Let’s start with the 2015 data in the above chart. Here we see mortgage rates make a significant drop of 13% in the quarter. Home prices increase by 12%, and payments rise by 5% a year later. Cheaper credit gave sellers access to buyers with increased budgets. Seller’s absorbed any savings from the interest rate cut. 

The same thing happens in 2020, with the infamous rate cut that inflated housing bubbles across the country. A drop of 26% in mortgage interest occurs after repeated slashing of rates in the first half of the year. Then they bought mortgage bonds and used quantitative ease (QE) to make the debt even cheaper. Home prices rise 21.6% in the following year, and mortgage payments see an 11.7% increase. The entire mortgage cut hasn’t been absorbed, but home prices are still rising in the months after Q3.

More Expensive Mortgage Credit Led To Lower Payments

The inverse circumstance has also been observed for mortgages within the past five years. Mortgage interest costs rose 15.4% in 2018, with home price growth falling to 2.0% and payments -0.8% a year later. High population growth? Still present. Shortage of supply? More new homes are being delivered now. Higher mortgage payments? Not for home buyers.

Home Price Growth and Mortgage Payments Show An Inverse Relationship With Financing Costs

Running the trend of payments trailing mortgage rates by one year shows a strong negative correlation. For non-nerds, a negative correlation is the exact opposite of each other. Trailing mortgage rates means the payments are a year after the change in interest costs. 

Basically, when mortgage payments fall, home prices and payments rise a year later. When mortgage rates rise, home prices and payments see minimal growth — sometimes falling. It’s the exact opposite of what experts have been saying. It’s weird for experts to even say this, considering how the monetary system is designed. 

Tradition says low rates improve affordability because it’s cheaper to borrow. That makes sense at a high level. If you need to borrow the same amount of money, a lower rate means less interest and smaller payments. The problem here is affordability is an afterthought for the real reason rates are lowered.

Central banks lower rates to drive demand and create inflation. Rates are intentionally lowered to entice borrowers to use the cheap debt. By driving demand, inflation can rise to help the central bank hit its target inflation rate. The goal is literally higher prices. 

The BoC said something to this effect back in December 2020. “A key reason we are using QE is that we currently face the opposite problem [of high inflation] — low inflation,” wrote the BoC. Right, still a mystery why inflation is so high. Maybe it was the dingos?

When inflation is too high, or credit growth excessive, responsible central banks raise rates. By raising rates, they’re looking to lower demand. By reducing demand, fewer people compete for the same goods, allowing prices to fall. Rising rates are a tool to help balance excess consumption, easing supply constraints. Predictably, this lowers home price growth and makes housing more affordable for buyers. It’s literally how the system is designed.

Most people have been misled to believe low rates make housing affordable, but it’s not true. Perhaps in a model where prices are static, and the influence of demand isn’t factored. However, one has to completely ignore why rates are lowered in the first place — which is to drive demand.

Even the BoC’s own recent research shows they were wrong about low rates and home prices. Home prices surged even higher by lowering rates for the past 20 years, as prices absorbed the increase in leverage. Once again, the exact way the monetary system is designed. Whoops.



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  • Frank 3 years ago

    In the early 80s I remember the government giving us a rebate on interest costs because they had to raise them to lower inflation.

    • Trader Jim 3 years ago

      The issue is the government thinks prices should go up, but never down for everything. Central bankers think the solution to a recession is to have the price of goods rise.

  • Jay 3 years ago

    I don’t remember any rebates in the 80s , when the rates go up you pay more plain and simple this is why they raise the rates.

    • Craig 3 years ago

      There was a tax rebate in the early 1980s for an inflation deduction. I distinctly remember this.

  • Trevor 3 years ago

    Does this include pre-construction?

  • Kyle 3 years ago

    Austrian-school economics has always maintained that high interest rates align with stronger economies since it kills inefficient allocation. Makes sense.

    • Jimmy 3 years ago

      Now it’s my turn to say, “What?”

      If this is true and not tongue in cheek, do you have any recommended reading? I’d be interested to learn a bit about the theory behind this.



  • John Sinclair 3 years ago

    Where is the research paper link from the Bank of Canada? I don’t see it.

    • Gerald Haw 3 years ago

      The article links to another article the central bank presented.

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