Experts Warn: BoC’s Rapid Rate Cuts Could Fuel a Real Estate Surge

Canada’s heavy reliance on real estate may severely constrain the central bank’s maneuverability. In its September meeting, the Bank of Canada (BoC) trimmed the overnight rate by 25 basis points to 2.50%, a move widely anticipated. Markets are pricing in further cuts, but economists at BMO caution that acting too aggressively could unravel recent stabilization in the housing sector and spark renewed speculative fervor.

Real vs. Negative Interest Rates

Before unpacking BMO’s concerns, it is crucial to understand real interest rates and when they turn negative. The real rate equals the nominal rate minus inflation. With the overnight rate at 2.5% and headline inflation at 1.9%, the real rate stands at only 0.6%, essentially hovering near zero. 

When inflation outpaces nominal rates, real rates become negative. This means borrowing becomes effectively cheaper over time, as the cost of debt is eroded by inflation. Policymakers use this mechanism to encourage borrowing, boost liquidity, and stimulate demand.

Interestingly, while headline inflation sits at 1.9%, core inflation measures favored by the BoC—like CPI-common (2.5%), CPI-trim (3.0%), and CPI-median (3.1%)—are much higher, suggesting real rates may already be neutral or negative under alternative calculations. 

Cheap Credit: The Fuel Behind Canada’s Housing Obsession

Canada’s prolonged housing boom has provoked debate: speculation, immigration, and supply constraints all get credit. However, BMO economists emphasize one consistent propellant: ultra-cheap credit. “For at least two decades, housing has been Canada’s obsession, and post‑GFC ultra‑low rates acted like rocket fuel,” says BMO rates strategist Benjamin Reitzes. 

Canadian home prices are exceptionally sensitive to changes in real interest rates. When credit was nearly free in 2020, housing surged despite flattened population growth. As rates normalized, markets cooled—even amid record population increases. Reitzes cautions: accelerate rate cuts and the gains made in tempering speculation could reverse.

BMO’s Warning: Draw the Line Before Negative Rates

BMO advises policymakers to establish firm boundaries, avoiding a slide into negative real rates or nominal rates dropping into the “1-handle” range. “Returning to negative real rates—or a nominal rate in the 1.x zone—would likely reignite housing mania,” Reitzes warns. 

Though BMO sees sound rationale in easing amid softening labour markets and moderating inflation, it argues that the backdrop of real estate risk must restrain the pace of rate cuts. While easing offers short-term relief, it could jeopardize housing affordability, destabilize markets, and threaten Canada’s long-term economic health.

Canadian Real Estate Bubble May Resume If BoC Cuts Too Fast: BMO