Interest Rates vs. Inflation: The Battle That Decides What You Can Afford

If you’ve been following the headlines lately, you’ve probably noticed two terms that always seem to go hand in hand: inflation and interest rates. These two economic forces play a huge role in shaping the housing market — influencing everything from mortgage rates and home prices to buyer confidence and affordability.

Here’s a breakdown why this connection matters in real estate:

The Core Relationship: When Inflation Goes Up, Interest Rates Usually Follow

Inflation happens when the cost of goods and services rises over time — in other words, when your money doesn’t stretch as far as it used to. To keep inflation from getting out of control, the Bank of Canada adjusts its policy interest rate — the rate that influences how much it costs to borrow money.

When inflation rises too quickly, the Bank of Canada tends to increase interest rates to help cool the economy.

• Higher borrowing costs slow down spending and reduce demand for goods, services, and housing.
  
• As spending slows, inflation usually starts to come back down.
  

On the other hand, when inflation is low and the economy needs a boost, the Bank of Canada will cut interest rates to make borrowing cheaper — encouraging people to spend, invest, and borrow again.

In short:
High inflation = Higher interest rates
Low inflation = Lower interest rates

What This Means for the Real Estate Market

Interest rates directly affect mortgage affordability, which makes them one of the biggest drivers of housing activity.

• When rates rise: Monthly mortgage payments go up, reducing what buyers can afford to spend on a home. This often leads to fewer bidding wars, longer days on market, and in some cases, softening home prices.
  
• When rates fall: Borrowing becomes cheaper, more buyers enter the market, and competition tends to heat up again — especially in already tight housing markets like Toronto or Vancouver.
  

It’s a balancing act!  If rates drop too quickly, demand can outpace supply and push prices higher again, bringing inflation pressure right back into play.

Why Inflation Still Matters (Even if Rates Are Falling)

A rate cut might sound like universally good news for real estate, but it’s not the full picture.
If inflation isn’t coming down as quickly as expected, the Bank of Canada could pause or reverse cuts to prevent the economy from overheating again.

That’s why savvy buyers and investors don’t just watch mortgage rates, they keep an eye on inflation trends too. When inflation finally stabilizes within the Bank’s target range (around 2%), that’s when rate reductions are most likely to be sustained and stable, creating healthier conditions for long-term growth.

Inflation and Interest Rates Are Like a Balancing Scale

When one rises, the other often moves in the opposite direction. For the real estate market, these shifts can mean the difference between a competitive seller’s market and a more balanced playing field.

Whether you’re buying, selling, or investing, understanding how these two forces work together can help you make smarter, more informed decisions.

If you’re curious about how current rates are shaping opportunities in today’s market  or how to position yourself for what’s next – we’d be happy to walk you through the latest data and trends specific to your real estate goals!