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

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.