Canada Grapples With the Aftermath of Years of 'Easy Money'

After an extended period of exceptionally low interest rates and large-scale asset purchases, Canada is confronting the structural consequences of what policymakers call “easy money.” The prolonged era of accommodative monetary policy helped stabilize the economy during crises and supported borrowing, consumption and a sharp rise in home prices — but it also left behind elevated household debt, stretched housing affordability and new strains on financial institutions.

As the Bank of Canada shifts toward tighter policy to combat inflation, many households face higher mortgage payments, especially on variable-rate and soon-to-reset loans. Mortgage renewals and resets could compress consumer spending, increase delinquency risk for vulnerable borrowers and slow growth in consumption-driven sectors. Provincial governments that benefited from buoyant property markets and strong revenue flows may also see budgets tested if real estate activity cools.

The housing market is a central lens for the adjustment. Years of demand-driven price appreciation, amplified by low rates, outpaced supply and intensified affordability challenges in major urban centers. Rising borrowing costs have begun to cool transaction volumes and price growth, but the correction’s pace and regional variation could expose owners, lenders and insurers to losses in areas with the greatest price imbalances.

Canada’s major banks entered the policy normalization with strong capital positions and profitable balance sheets, yet they are not immune. Higher rates can both improve net interest margins and increase credit risk. Commercial real estate pockets, consumer credit card balances and small-business loans warrant closer scrutiny. Regulators and the Canada Mortgage and Housing Corporation have tools to mitigate systemic risk, but bridging the transition without triggering broader economic pain is complex.

Ultimately, the legacy of easy money requires a multi-pronged response: prudent central-bank communication, targeted macroprudential measures, accelerated housing supply reforms and fiscal planning that reduces vulnerability to housing cycles. Policymakers must balance containing inflation and rebuilding policy space while supporting an orderly adjustment that protects the most exposed households and sectors.