The Bank of Canada has slashed the overnight rate by 200 basis points over the past year, a move that reflects its efforts to stabilize the economy amid rapid population growth and shifts in the housing market. As Canada's population surged by 4.3% from 2020 to 2024, largely due to immigration, total employment saw an impressive 6.25% increase during the same period. In contrast, the United States and Mexico experienced more modest population increases of 1.4% and 2.6%, respectively. However, fewer than 20% of homes in Canada are purchased through conventional mortgages from financial institutions, unlike the United States, where 70% of homes are acquired this way. This difference means interest rate movements have a limited impact on Canadian housing supply and demand.
Canadian housing starts are projected to decline to 225,000 units in 2025 and 2026, before rebounding to 250,000 units in 2027. This forecast occurs in a market where the median house price is nearly nine times the median income, compared to five times in the United States. The disparity suggests a potential risk of a larger price correction in Canada's housing market in the near term. Meanwhile, the US government is grappling with fiscal sustainability concerns, running a fiscal deficit of 7% of GDP despite low unemployment and strong economic growth.
The sharp reduction in Canada's overnight rate aims to stimulate economic activity by encouraging borrowing and spending. This strategy comes as the country witnesses significant population growth driven by immigration, which has been a crucial factor in boosting the labor market. The increase in total employment by 6.25% since 2020 highlights the positive impact of population growth on Canada's economy. In comparison, the US and Mexico have experienced slower population growth rates, reflecting different demographic and economic dynamics.
Canada's unique mortgage landscape means that changes in interest rates do not significantly influence housing supply and demand as they do in other countries. With fewer than 20% of homes purchased using conventional mortgages, Canadians often rely on alternative financing methods, reducing the sensitivity of the housing market to interest rate fluctuations. In contrast, the US market is more directly impacted by interest rate changes due to its reliance on conventional mortgages.
The projected decline in Canadian housing starts to 225,000 units in 2025 and 2026 signals potential challenges ahead for the housing sector. This decrease follows years of robust growth driven by population increases and employment gains. However, the expected rebound to 250,000 units in 2027 suggests that the market could recover if economic conditions remain favorable.
The median house price in Canada being nearly nine times the median income raises concerns about affordability and sustainability. This figure contrasts sharply with the US, where the median house price is five times the median income. The disparity highlights potential vulnerabilities in Canada's housing market, with experts warning of a possible price correction if economic conditions shift unfavorably.
In addition to domestic challenges, Canada faces broader economic uncertainties linked to fiscal policies in neighboring countries. The US government's fiscal sustainability remains a concern as it manages a fiscal deficit of 7% of GDP despite favorable economic conditions. This situation underscores potential risks for North American economies as they navigate complex fiscal and monetary landscapes.