The Bank of Canada faces mounting pressure to reduce interest rates amid persistent challenges in the housing market and broader economic concerns. Despite a series of aggressive rate cuts in recent years intended to stimulate growth, a significant portion of Canadians remains unable or unwilling to enter the housing market. A recent survey of 1,501 non-homeowners by personal finance platform NerdWallet revealed that over half do not plan to purchase a home within the next year, with one-third citing an inability to afford a down payment.

Housing affordability continues to strain financial capacity, particularly among Canadians aged 18 to 34. Current affordability ratios are about 20 percent more stretched than the 25-year average, even after the Bank of Canada’s interventions and a nationwide correction in home prices. Experts suggest that if home prices continue to decline, further rate easing from the central bank will become necessary to counteract the deflationary pressures in real estate.

Mortgage rates have remained relatively steady, with the average five-year fixed mortgage rate hovering around 5.13 percent over the past year, in fact increasing slightly. This rate is influenced less by the Bank of Canada’s overnight rate, which it controls directly, and more by bond markets closely aligned with U.S. Treasury yields. With U.S. yields rising by approximately 50 basis points in the past three months, Canadian borrowing costs have similarly faced upward pressure.

Household debt levels in Canada remain elevated. The household debt-to-income ratio has reached 166 percent, significantly above the U.S. peak before the 2007 financial crisis. Debt service ratios are near historic highs, close to 14.75 percent, surpassing levels seen in the early 1990s when interest rates were substantially higher. For first-time homebuyers, the median loan-to-income ratio is at a record 365 percent, with one in five borrowers exceeding 450 percent. This debt burden, combined with rising mortgage costs, has contributed to a more than 10 percent increase in personal bankruptcies over the past year, reaching nearly 3,000 cases—a figure comparable to levels during the height of pandemic-related economic uncertainty in spring 2020.

The implications of ongoing housing market weakness also extend to the banking sector, which collectively holds approximately $1.7 trillion in residential mortgages, nearly half their total loan portfolios. A prolonged downturn in real estate values could trigger increased delinquencies, potentially threatening the recent strong performance of Canadian bank stocks.

Given these factors, analysts argue that there is little justification for further interest rate hikes from the Bank of Canada at this time. Instead, many anticipate the next move to be a rate reduction. With the U.S. Federal Reserve adopting a more hawkish stance, the yield spread between Canadian and U.S. short-term bonds is expected to widen, putting downward pressure on the Canadian dollar. Projections suggest the loonie could weaken to around 65 U.S. cents or lower, levels not seen since the late 1990s.

Adding to the uncertainty are looming trade risks. Should the United States decide to withdraw from the United States-Mexico-Canada Agreement (USMCA), the Canadian business investment outlook could weaken further, compounding the domestic economic challenges.