Rate Hikes Hit House Prices Fast and Homebuilding Slowly

Bank of Canada research on the Canadian housing market turns up an asymmetry worth understanding. When the policy rate rises, average house prices fall substantially and persistently. Housing starts and building permits fall too — but the paper says their implied effect on the future housing stock is both slow and modest. Interpreted through the lens of market equilibrium, the results are most consistent with housing demand responding more strongly than housing supply. In plain terms, the price adjustment is mostly buyers stepping back, not builders stopping. That distinction matters because both stories look identical in a headline about falling prices. A rate-driven decline in average prices is evidence that monetary policy is reaching the housing market, not evidence that the supply side is being fixed or broken.