This article was written and submitted by Cameron Levitt, a Toronto-based real estate agent with RE/MAX Hallmark who writes about housing dynamics, market trends, and the Canadian economy.
Bank of Canada (BoC) Governor Tiff Macklem's speech in Mexico City last week contained a quiet but unmistakable message for the Canadian housing market. The speech, titled Flexible Inflation Targeting in a Shock-Prone World, outlined how central banks must adapt to increased economic uncertainty and more frequent supply disruptions. Buried beneath diplomatic language about framework reviews and policy questions, Macklem delivered a subtly hawkish repositioning that should recalibrate expectations about future rate cuts.
The signal came through Macklem's framing of housing within the Bank's upcoming 2026 policy review. As part of the Bank's five-year framework renewal process with the federal government, Macklem stressed the Bank will not abandon its 2% inflation target and discussed moving away from traditional base-case economic models toward scenario-based decision making that weighs multiple potential outcomes and risks. By explicitly examining "the interaction between monetary policy, housing affordability and inflation," he's no longer treating housing as separate from core inflation management. More telling was his observation that while "monetary policy cannot directly increase the supply of housing," it does have "a direct effect on the demand for housing." This isn't academic musing, it's a central banker explaining why housing concerns won't override inflation priorities.
The repositioning matters because it fundamentally changes how the Bank views rate decisions when housing affordability is stressed. If housing demand is now explicitly viewed through an inflation lens, rate cuts that might ease mortgage payments become problematic when they risk reigniting housing inflation. Macklem's framework makes the trade-off explicit: easier money might help some buyers afford payments, but it also fuels the demand that drives prices higher.
This represents a subtle but significant hawkish shift. Rather than declaring policy intentions outright, Macklem is reshaping the analytical framework to explicitly address misconceptions about monetary policy's role in housing. Real estate prices have become recognized as a constraint on easing policy. The Bank's messaging shifts from implicit to explicit about the trade-offs between rate policy and housing demand.
The timing reflects hard-learned lessons. When the Bank cut rates aggressively during the pandemic, housing prices surged 40% nationally between early 2020 and early 2022. Housing costs now represent roughly 28% of the Consumer Price Index, making them central to inflation dynamics rather than peripheral to monetary policy. This experience likely informs Macklem's current positioning about demand-side risks.
Economic fundamentals support this hawkish lean. Canada adds roughly twice the new residents annually compared to the housing units it builds. In this supply-constrained environment, monetary stimulus faces diminishing returns for affordability while maintaining inflationary risks. Lower rates might reduce carrying costs, but they intensify competition and drive prices higher. The Bank appears to be acknowledging this dynamic creates more problems than it solves, by noting that housing supply falls to "elected governments" while demand responds directly to interest rates. This positioning distances monetary policy from housing solutions while acknowledging its role in housing problems of the past.
The implications are significant for market expectations. The prevailing industry narrative that lower rates will inevitably help housing affordability now conflicts with a central bank that explicitly views such assumptions as misguided. Instead of waiting for rate relief to ease housing costs, buyers now face a central bank that views such relief as potentially counterproductive. Affordability improvements must come through supply increases, income growth, or market corrections rather than easier credit conditions.
This shift reflects the Bank's broader evolution toward scenario-based decision making in an increasingly unpredictable world. Macklem emphasized that elevated uncertainty means "we put less weight on the base-case projection and more weight on the risks," using multiple scenarios rather than single forecasts. Crucially, this approach now extends to housing policy, where future rate cuts must be contemplated through their potential inflationary effects on housing demand rather than any assumed affordability benefits. The widespread expectation that rate cuts help housing affordability is being explicitly rejected through this analytical framework.
The message for Canadians is subtle but clear: Rate policy will respond to economic fundamentals through a lens that now explicitly considers housing inflation risks. The central bank hasn't ruled out future easing, but it has fundamentally altered how such decisions are evaluated, with housing demand effects becoming a recognized constraint rather than an assumed benefit.
