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Bank of Canada governor Tiff Macklem says the central bank can’t solve the housing crisis with interest rates because the root cause is a supply shortage.

Macklem appeared before MPs on the finance committee Thursday, just over a week after the most recent interest rate decision and faced multiple questions on housing affordability.

The governor acknowledged that high interest rates are feeding into higher housing costs, but he noted that shelter price inflation has remained high during times of both low and high interest rates.

“You’re not going to solve housing with low interest rates, and you’re not going to solve it with high interest rates. We’ve tried both. And we’ve had high shelter price inflation,” Macklem said.

High interest rates have raised the cost of taking out or renewing a mortgage and made it more expensive for developers to secure credit for building homes.

However, low interest rates also push shelter costs up by stimulating more demand for housing. As people rush to buy homes in a lower rate environment, prices rise in turn.

Macklem said government should be focused on increasing housing supply to improve affordability, and warns policies that increase demand will worsen it.

Last week, the Bank of Canada continued to hold its key interest rate at 5% and signalled it has begun considering the timeline for rate cuts. Economists widely expect the central bank to begin cutting interest rates around the middle of the year.

However, the pace at which inflation falls in the coming months could affect this timeline.

The Bank of Canada has singled out rapidly rising shelter costs as the primary reason why inflation is still above the 2% target.

Canada’s overall inflation rate was 3.4% in December. Meanwhile, shelter prices were up 6% from a year ago.

Rent prices in Canada soared last year as supply struggled to keep up with demand, leading to the lowest national vacancy rate on record since the Canada Mortgage and Housing Corp. began tracking that data in 1988.

The federal housing agency said in a report Wednesday that the vacancy rate for purpose-built rental apartments sat at 1.5% during the first two weeks of October 2023, when it conducted its annual survey.

That was down from 1.9% a year earlier, which at the time had been the lowest national vacancy rate in over two decades.