How the Bank of Canada’s Interest Rate Shift Could Impact the Housing Market
Tom Van Horne • January 31, 2025
On January 29, 2025, the Bank of Canada announced a 25 basis point reduction in its policy interest rate, bringing it to 3.0%. This decision marks the sixth consecutive rate cut since June 2024, reflecting the central bank's ongoing response to evolving economic conditions.
A Brief History
Over the past decade, Canadian interest rates have experienced significant fluctuations. Between 2015 and 2018, the Bank of Canada raised its policy rate from 0.5% to 1.75% as the economy strengthened, leading to a moderation in housing sales following a period of high demand.
In 2020, during the global pandemic, the Bank slashed rates to a historic low of 0.25%, spurring an unprecedented surge in home sales and price growth due to more affordable borrowing costs. Housing prices peaked in 2022, but rising inflation prompted the Bank to aggressively increase rates, reaching a high of 5.0% in early 2024. These sharp increases significantly reduced sales volumes as affordability challenges grew for Canadians. By late 2024, the policy rate had been reduced to 3.25%, with the housing market remaining relatively subdued compared to the activity seen over the past decade.
Recent Developments
The latest rate cut to 3.0% comes amid potential economic challenges, including the threat of a 25% tariff on Canadian imports proposed by the U.S. administration, set to take effect on February 1. This external pressure has contributed to economic uncertainty, influencing the Bank's decision to lower rates.
Future Outlook
Building on this historical perspective, Canada's 25-year average Policy Interest Rate stands at approximately 3.5%, reflecting a balance between the ultra-low rates of the 2010s and the higher rates of the late 1990s and early 2000s. If history serves as a guide, we can anticipate a return to more typical sales volumes, with most forecasts projecting a steady rise in home prices as the 2020s draw to a close.
This evolving landscape presents strategic opportunities for buyers and investors ready to navigate a cautious but improving environment. With the current policy interest rate stabilizing and inflationary pressures easing, market conditions are expected to gradually shift toward a more balanced state over the next five years. This balance will likely result in moderate but consistent growth in home prices, increased market activity, and improved affordability as income levels align more closely with housing costs.
For buyers, this period offers the chance to secure properties in a less competitive market, while investors can benefit from steady long-term appreciation and more predictable returns. As inventory levels stabilize and borrowing conditions become clearer, the housing market is poised to transition into a healthier equilibrium, where both supply and demand operate in tandem to support sustainable growth.
Data Source: Bank of Canada
For more info on the history of the key interest rate follow this link to the Bank of Canada website: A history of the key interest rate - Bank of Canada
For more info on understanding the policy interest rate follow this link: Understanding our policy interest rate - Bank of Canada
Over the past decade, Canadian interest rates have experienced significant fluctuations. Between 2015 and 2018, the Bank of Canada raised its policy rate from 0.5% to 1.75% as the economy strengthened, leading to a moderation in housing sales following a period of high demand.
In 2020, during the global pandemic, the Bank slashed rates to a historic low of 0.25%, spurring an unprecedented surge in home sales and price growth due to more affordable borrowing costs. Housing prices peaked in 2022, but rising inflation prompted the Bank to aggressively increase rates, reaching a high of 5.0% in early 2024. These sharp increases significantly reduced sales volumes as affordability challenges grew for Canadians. By late 2024, the policy rate had been reduced to 3.25%, with the housing market remaining relatively subdued compared to the activity seen over the past decade.
Recent Developments
The latest rate cut to 3.0% comes amid potential economic challenges, including the threat of a 25% tariff on Canadian imports proposed by the U.S. administration, set to take effect on February 1. This external pressure has contributed to economic uncertainty, influencing the Bank's decision to lower rates.
Future Outlook
Building on this historical perspective, Canada's 25-year average Policy Interest Rate stands at approximately 3.5%, reflecting a balance between the ultra-low rates of the 2010s and the higher rates of the late 1990s and early 2000s. If history serves as a guide, we can anticipate a return to more typical sales volumes, with most forecasts projecting a steady rise in home prices as the 2020s draw to a close.
This evolving landscape presents strategic opportunities for buyers and investors ready to navigate a cautious but improving environment. With the current policy interest rate stabilizing and inflationary pressures easing, market conditions are expected to gradually shift toward a more balanced state over the next five years. This balance will likely result in moderate but consistent growth in home prices, increased market activity, and improved affordability as income levels align more closely with housing costs.
For buyers, this period offers the chance to secure properties in a less competitive market, while investors can benefit from steady long-term appreciation and more predictable returns. As inventory levels stabilize and borrowing conditions become clearer, the housing market is poised to transition into a healthier equilibrium, where both supply and demand operate in tandem to support sustainable growth.
Data Source: Bank of Canada
For more info on the history of the key interest rate follow this link to the Bank of Canada website: A history of the key interest rate - Bank of Canada
For more info on understanding the policy interest rate follow this link: Understanding our policy interest rate - Bank of Canada
