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How Do Interest Rates Spur the Housing Market: Exploring Nonlinear Effects

Author

Listed:
  • Benjamin Straus
  • Stéphane Surprenant
  • Kerem Tuzcuoglu

Abstract

In this note we examine how monetary policy affects housing demand, supply and prices in Canada, and whether these effects vary with labour market conditions. Using state-dependent local projections identified with narrative monetary policy shocks, we find that lower interest rates have larger effects when unemployment is low. Easing boosts resales quickly, raises housing starts with a delay, and increases house prices persistently. Because demand tends to respond more strongly than supply, monetary policy appears unable to alleviate housing affordability pressures and may instead intensify them when labour market conditions are strong.

Suggested Citation

  • Benjamin Straus & Stéphane Surprenant & Kerem Tuzcuoglu, 2026. "How Do Interest Rates Spur the Housing Market: Exploring Nonlinear Effects," Staff Analytical Papers 2026-35, Bank of Canada.
    • Handle: RePEc:bca:bocsap:26-35
    DOI: 10.34989/sap-2026-35
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    Keywords

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    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E - Macroeconomics and Monetary Economics
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • R - Urban, Rural, Regional, Real Estate, and Transportation Economics
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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