Canada’s real estate addiction may limit the central bank’s ability to respond to loosening conditions. The Bank of Canada (BoC) cut its overnight rate by 25 basis points to 2.50% at its September meeting, as expected. Markets are pricing in more cuts, but BMO economists caution that moving too fast risks undoing recent housing market stabilization and reigniting exuberance.
Real and Negative Interest Rates
Before diving into BMO’s warning, it’s important to understand two key financial concepts: real interest rates and negative real rates.
The real interest rate is the inflation-adjusted interest rate—calculated by subtracting inflation from the nominal rate. With the overnight rate at 2.5% and headline inflation at 1.9%, the real rate is 0.6%—barely above zero.
Negative real rates occur when inflation exceeds the nominal rate. Borrowing costs fall below the rate at which money loses value, effectively making debt cheaper over time. Policymakers use this to stimulate borrowing, boost liquidity, and drive demand.
An overlooked question is how inflation is measured. Headline inflation gets the most attention, but it’s volatile. The BoC prefers to minimize volatility by using core inflation measures that were much higher in August: CPI-common (2.5%), CPI-trim (3.0%), and CPI-median (3.1%). By these metrics, the real rate is already at or below zero.
This doesn’t even touch on concerns from banks about recent CPI modeling changes that understate inflation—but that’s a separate issue. What we’re getting at—if inflation happens and it’s not captured in a model, does it exist? But let’s not digress—back to BMO’s warning.
Canada’s Housing Obsession Fueled By Easy Money
The narrative of Canadian real estate’s epic multi-decade price growth is heavily debated. Everything from speculation to immigration has been blamed, and while many of these factors are contributors, only one is required to feed that growth—cheap credit. A point that’s not lost on BMO economists.
“Housing has been a Canadian obsession for at least two decades, with ultra-low rates providing jet fuel to the market since the GFC,” explains BMO Canadian Rates & Macro Strategist Benjamin Reitzes.
Canadian Real Estate Prices Are Hypersensitive To Real Rates
Canadian home prices benefited from plunging rates stimulating borrowing for at least two decades. That went into hyperdrive in 2020 when rates were cut to nearly zero and population growth stalled, but credit was effectively free. Home sales—and prices—plunged as rates rose to healthy levels, despite record population growth.
“A normalization of interest rates has prompted some sanity to return to the market with a decent amount of froth coming out of prices,” explains Reitzes.
He suggests the BoC consider the delicate balance, as cutting too far could reverse this progress—or worse, stimulate excessive market activity and drive speculation.
Bank of Canada Should Draw Line At Negative Rates, Warns BMO
The bank warns policymakers to consider drawing a line at real negative rates, or even nominal rates with a “1-handle.” Slashing rates below this key level is likely to serve as a psychological trigger for buyers and investors.
“A return to negative real rates and/or nominal rates with a 1-handle will likely spark renewed housing exuberance that policymakers… should not want to see,” warns Reitzes, adding that this would run contrary to the cautious tone and government policy goals—well, the stated policy goals.
BMO sees labour market weakness and slowing inflation as justification for easing, but warns that housing risks should limit how far the BoC goes. Both the central bank and policymakers need to weigh the risk of reigniting a bubble. While rate cuts offer short-term relief, they threaten housing stability, future affordability—and ultimately, the economy’s long-term prospects.
Nope. Not this time. Rates and savin it. 100% economic headwinds + 0% economic tailwinds, coupled with massive over-indebtedness wins this battle for reality this time. Guaranteed. The bubble is popped. The crash is just beginning. No turning this ship around now. My call: bank bailouts by Q1 2027.
Negative real rates don’t have to save the bubble. They just have to generate enough liquidity that the risk transfers from older investors close to retirement to poorer/younger households that can ride out the losses over time.
See what US policy makers said during the 2008 bubble, which undermined the whole 2008 narrative crafted post-crash.
Maybe with a healthy economy. We do not have a healthy economy. We have a death of money debt-fueled life support machine that is crumbling under its own weight will the mighty and predatory AI hunts for low hanging fruit, AND a reversal on the immigration ponzi. It’s crashing already. Nothing can stop it. Get out while you can if you are highly leveraged.
Has any BoC governor prior to Tiff ever slashed rates with such high core inflation measures? I doubt 2010s Tiff would have done this, but 2020s Tiff seems to dismiss every indicator as just “temporary,” apologizes for misreading, and then pretends the apology never happened and it’s “external” problems causing everything he doesn’t like.
This tracks. Remember “low for long” right before hiking? It’s a transfer of wealth.
So…..
There is a need to open more machine shops in Canada.
Let’s see,with my accumulated wealth what will my unencumbered million get me?
NOT ENOUGH!!!!
Only just enough to buy a house, forget investing in Canada or a small business, rents cost WAY TOO MUCH IN CANADA to start a business.
Unless it’s insurance or banking.
Gee I wonder why all of the small businesses are disappearing?
If house values fell small business would have a chance in this country….As it stands all the money goes to the business of housing and commercial real estate. Seems unwise, we need real businesses that can employ non university educated citizens,we’ve lost that. How do we get it back? It would be great for the country.
So short term relief it will be. Quickest way to get re elected…
It is an overnight rate.
I can’t remember last time I took an overnight mortgage or overnight business loan.
Weren’t common for mortgages until 2020, now everyone think’s they’re a rate forecaster and gambling on cuts/hikes.
Most business loans a variable rate ex capital financing, and even then it’s still fairly common since the vast majority of businesses seeking capital can’t exactly issue bonds to secure their terms.
Yup, our corrupt politicians and bankers will soon have real interest rates negative again, to save the housing market, the banks, and the over-indebted voters, so expect FOMO and irrational exuberance to soon return!
Meanwhile, young people have almost stopped having babies here due to the high cost of housing, so the next generation of ‘Canadians’ will be born in a country with more to offer our young people. A made-in-Canada economic disaster is incoming.
Banks are almost looting poor Canadians. They don’t care economy. There are no sale of condos n real-estate is struggling for homes sales. Reducing interest rates will make people affordable buying. Banks don’t like that then don’t worry. Government should do better for ppl and economy. Thank you