New analysis by the C.D. Howe Institute sheds light on the rise of new home prices during the pandemic’s run of historically low interest rates and the effects of subsequent rate hikes on the housing market.
The analysis draws on the Bank of Canada’s New House Price Index which tracks changes over time in contractors’ selling prices of new residential houses.
In 2020, the Bank of Canada lowered its overnight rate to just 0.25 percent to stimulate the economy in response to the pandemic. New home prices rose by 14.2 percent year-over-year between August 2020 and 2021.
In the post-pandemic era, the bank has raised its rate 10 times. The overnight rate now sits at 4.25 percent. Yet new home prices have only fallen as much as 1.6 percent year-over-year between November 2023 and 2024.
If pandemic-era interest rates contributed to a spike in housing demand and in turn prices of new homes, higher rates have only had a moderate effect on post-pandemic prices.
Despite the Bank of Canada’s overnight rate reaching as high as five percent in late 2023 (a record since it took on the 2-percent inflation mandate), a new home’s cost relative to 12 months earlier fell no more than 1.6 percent.
This suggests that monetary policy is not the only factor influencing housing prices. The ongoing gap between supply and demand is being influenced by other trends such as large-scale population growth and ongoing land-use policies and development fees.
Construction costs have also increased in every major Canadian city due to the cost of labour and materials, according to Statistics Canada.
Similar to housing prices, interest rates play a role in the supply of new homes as well: when rates are high, construction firms will spend more of their revenue on interest on loans and other non-construction costs. This is suggested when looking at housing starts from 2020 to August 2024—a period in which interest rates moved up and down.

Mt. Rundle rises behind homes being constructed in Canmore, Alta., Monday, April 24, 2023. Jeff McIntosh/The Canadian Press
For instance, between 2020 and 2021, total housing starts rose 24 percent from 217,880 to 271,198, while detached home starts alone rose 36 percent from 60,023 to 82,116. Both were the greatest annual start increases since at least 2015. This was amid record low interest rates, resulting in home buyer demand and builder opportunities.
In 2022, total and detached home starts both fell by three and 11 percent compared to 2021. This as limited supply and soaring home prices discouraged demand.
In 2023, interest rates rose to 4.5 and 5 percent. Total housing starts fell further to 240,267. Starts on detached homes, meanwhile, numbered just 54,616, a 24 percent fall from the year previous, a 33 percent fall from 2020, and the fewest since at least 2015.