Recent employment figures in Canada are widely seen as favorable for the announcement of new interest rate cuts by the Bank of Canada.

In June, the economy lost 1,400 jobs and the unemployment rate reached 6.4%, up 0.2% from May. The loss of about 3,000 full-time jobs was somewhat offset by the creation of approximately 2,000 part-time positions. Economists believe these figures give the Bank of Canada more room to cut interest rates again.

The prospect of a rate cut is obviously attractive to anyone looking to obtain or renew a mortgage, but affordability is unlikely to improve despite lower interest fees.

Impact of Interest Rates on Affordability

Economist Marc Desormeaux recently conducted simulations to study the impact of commonly proposed solutions to Canada's housing affordability problem, including lower interest rates. He found that the reduction in interest rates should be moderate in the short term, making the relief in mortgage payments minimal and likely to be offset by rising property prices.

Desormeaux noted that income growth is expected to be modest, which moderates or even nullifies the likelihood of improved affordability.

Other Proposed Solutions

Desormeaux also examined extending amortization periods, limiting immigration, increasing new listings, and recession scenarios. All these scenarios were deemed ineffective, and only in the short term.

"Increasing the housing supply is the only sustainable long-term solution," Desormeaux writes in his report.

In conclusion, while interest rate cuts may offer some relief to borrowers, they are not a miracle solution for improving housing affordability. The focus must be on increasing the housing supply to achieve lasting results.