The central bank lowered its overnight rate by 25 basis points to 2.50%, but economists at BMO are waving a red flag: cut too quickly, and Canada risks reigniting the very real estate bubble policymakers have spent the last two years trying to cool.
Why Real vs. Nominal Rates Matter
On paper, interest rates look higher than they’ve been in years. But when you adjust for inflation, the story changes.
- Overnight rate: 2.5%
- Headline inflation: 1.9%
- Real rate: just 0.6%
Factor in the Bank of Canada’s preferred core inflation metrics—CPI-common (2.5%), CPI-trim (3.0%), CPI-median (3.1%)—and the real rate is already hovering at or below zero. That effectively makes borrowing money cheaper than holding cash, a dynamic that fuels borrowing, spending, and, yes—housing demand.
Canada’s Housing Obsession Runs on Cheap Credit
For decades, cheap credit has been the oxygen of Canada’s housing market. Whether you blame immigration, speculation, or supply shortages, one factor consistently fuels price growth: ultra-low interest rates.
As BMO strategist Benjamin Reitzes put it:
“Housing has been a Canadian obsession for at least two decades, with ultra-low rates providing jet fuel to the market since the GFC.”
The COVID-era plunge to near-zero rates supercharged demand, even as population growth briefly slowed. The result? A historic price surge followed by a sharp correction once rates normalized.
Why Another Bubble Could Be Around the Corner
With affordability already stretched and household debt at record highs, the Bank of Canada’s cuts must walk a fine line. A return to negative real rates or nominal rates with a “1-handle” (anything under 2%) could act as a psychological trigger for buyers and investors alike—risking another frenzy.
BMO warns that such conditions would undo recent stabilization, invite speculation back into the market, and clash with Ottawa’s stated affordability goals.
The Balancing Act Ahead
The BoC is under pressure: unemployment is rising, inflation is cooling, and businesses are hesitant to invest. But cutting too aggressively risks fueling another unsustainable housing boom—and leaving Canadians more vulnerable down the road.
For borrowers and investors, the message is clear: rate cuts may feel like relief, but they come with risks.
✅ Bottom Line: Cheap credit built Canada’s housing boom. If the Bank of Canada cuts too far, too fast, the next bubble could form before the last one fully deflates.
📊 At Lendworth Canada, we help borrowers and investors navigate shifting interest rate cycles with mortgage solutions that balance opportunity and risk. Whether you’re refinancing, securing a first or second mortgage, or looking for alternative lending options, our team is here to guide you.
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