Interest rates are front and centre in conversations about the Canadian housing market – especially now that they’re on the decline. Of course, following a red-hot real estate run during the pandemic days, the country’s interest rates started to climb. While the benchmark rate sat at 0.25% in March 2022, it then began an upward trajectory and didn’t stop until July 2023, when it reached a 22-year high of 5% (not that anyone needs the reminder). This contributed to everything from cancelled condo launches, to softening home prices, and fewer real estate transactions across the country.
Finally, after over two years, in June 2024, the Bank of Canada (BoC) cut its rate by 25 basis points to 4.75%. As of January 29, the borrowing rate has come all they way down to 3% – the lowest since early September 2022. The central bank’s latest cut is the first of 2025; with seven more rate announcements scheduled for 2025, many believe several more were on the way. At least, that was the case before tariff talks became a reality.
At any rate (no pun intended), the overall consensus – something driven home by economists and industry professionals – has been that Canada’s real estate market will rebound back to life with consecutive cuts. But, in this unpredictable (see: chaotic) socioeconomic climate, we may be placing too much weight on the impact of interest rates alone.
“The cost of borrowing is certainly always an important factor in analyzing and also forecasting the housing markets in Canada or anywhere else, given that most people borrow to buy a home, so it’s something that we obviously always follow,” says Canada Mortgage and Housing Corporation (CMHC) Deputy Chief Economist Kevin Hughes. “There’s the rate, but also other conditions that surround the rate as well, and that’s what we’re also looking at.”
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Signs Of Life From The Sidelines
While we’re still a far cry from the flurry of activity and bidding wars we saw during pandemic times, there are definitely signs of revival in Canada’s real estate market. In its latest housing market report, the Canada Mortgage and Housing Corporation (CMHC) acknowledges the macroeconomic uncertainty of today’s current climate and doesn’t identify a base case, but three plausible scenarios that could impact Canada’s housing market through the forecast timeframe. It takes into account the economy for the next year, even in the event of a 25% tariff on goods. Interest rates are the main variables, says Hughes. Generally, Canada’s home sales and prices are forecasted to rebound in the year ahead, says CMHC. While sales in Alberta and Quebec are expected to hit historic highs, sales in pricier markets, like British Columbia (BC) and Ontario, will remain below their 10-year averages and their prices will grow at a slower rate, thanks to affordability challenges and the impact of immigration targets.
“Should inflation continue to keep edging downward, the rate drops could continue in the short run and definitely that will have an impact – and has already had an impact – on demand for the next year,” says Hughes. He says this will most influence pent-up demand. “It’s the people who may have been ready to buy before the pandemic, but then the whole thing stopped their plans,” says Hughes. “And that was followed by a high inflation environment. So, this postponement of their buying decisions kind of built that pent-up demand. We expect that, with the current rate environment, it will express itself and become actual demand.” Hughes says this emergence from the sidelines involves many young first-time buyers, but also move-up buyers and down-sizers too. “We expect this group to orient their purchase probably more on the resale market because of its relatively lower price and its greater variety of housing,” says Hughes.
As of right now, there seems to be a correlation between dropping rates and sales in the notoriously unaffordable Greater Toronto Area (GTA). “The interest rate drops have indeed had an impact on the number of sales in 2024,” says Adrienne Lake, Managing Broker at Corcoran Horizon Realty in Toronto. “This is demonstrated by the increase in sales of 2.6% year-over-year, 2024 compared to 2023. The buyers' actions in 2024 have shown there is a cautious optimism with their return to the market.”
The sentiment among industry is that this activity will increase with future rate drops. “Borrowing costs have a significant impact on the buyer's behaviour,” says Lake. “With continued interest rate cuts (especially for first-time homebuyers), buyers will start to engage in their home search in greater numbers as they see the affordability that the lower interest rates offer.” Along that line of thinking, polling data from Ipsos released as part of last week’s market update from Toronto Regional Real Estate Board (TRREB), showed that more than 80% of renters polled in fall 2024 believed that a 2% (40% of respondents) or 3% (44% of respondents) drop in the interest rate would see their ability to purchase a home become viable. Since September 4, 2024, the rate has already come down 1.25%.
TRREB’s Vancouver counterpart, Greater Vancouver Realtors (GVR) says that the recent data is beginning to show lower rates stimulating sales in Vancouver, as would be expected. However, GVR’s Director of Economics and Data Analytics, Andrew Lis, points out that this comes after a somewhat lengthy lag from the start of the cutting cycle. “To finish 2024, the three final months all showed sales up over 30% year-over-year consecutively, which signalled that buyers were appearing more eager to re-enter the market heading into 2025,” says Lis. “As of the January (2025) statistics, sales remain up about 10% year-over-year, which is lower than the trend in the preceding months, but still a fairly strong showing for January, which is one of the slowest times of the year for the market from a seasonal perspective.”
Overall, Lis says there is “increasingly compelling evidence” that lower rates are finally stimulating buyer demand. “As long as the future path of rates continues to be downward, I would expect this trend to continue in 2025 barring any major economic calamities which could derail this trend,” says Lis. “I think the market is currently set up to be a strong year for sales in 2025, but our forecast takes a more conservative view of the degree to which sales may increase relative to 2024. At the aggregate level, we expect sales to be up about 14% relative to the 2024 totals by year-end, largely due to the stimulative impact of lower rates.”
Toronto Condo Development Fees (Quietly) Increased On June 6
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The Pre-Construction And New Home Market
It’s no surprise that the pre-construction market has taken a major hit in recent years, thanks to everything from interest rates, to construction costs, labour shortages, and hefty development fees. This has resulted in no shortage of cancelled and paused projects, especially in places like the GTA. Housing starts lagged in Canada's six largest cities in 2024. While the CMHC report forecasts increased activity in the resale market, the same can’t be said for the new home market. In fact, housing starts are expected to slow in the years ahead, posing challenges for a supply-strapped market.
While lowering interest rates certainly don’t hurt the embattled pre-construction market, in places like the GTA, sky-high development fees may be a bigger culprit when it comes to building (or not) and affordability. As the Building Industry and Land Development Association (BILD) highlighted in its September GTA Municipal Benchmarking Study, municipal fees in the GTA rose by a tough-to-swallow $42,000 per unit on a low-rise development and $32,000 on a unit in a high-rise development since the 2022 study. Meanwhile, apartment fees have climbed $32,000 to $122,387.
President of the Residential Construction Council of Ontario (RESCON) Richard Lyall points to a common rhetoric of some to make the developers pay for the fees. “The reality is the developers do not pay development charges,” he says. “They front it in the beginning because you have to pay these things up front. So, it looks like the developers pay for it to the uninitiated, but on closing, it all has to come out in the wash.” Meaning, the costs get passed down to the homebuyer. “You could be buying a two-bedroom luxury unit in a Four Seasons type of building and the development charge on that is the same as it is for the most affordable two-bedroom you can find – it doesn’t matter how big the two-bedroom is,” says Lyall. “And it's got nothing to do with income. So, immediately, the strangest thing is that the people who can least afford housing are getting hammered the most.”
According to TRREB'S brand-new new Fair Home Taxes on Ontario Home campaign, which demands lower home taxes, 36% of the purchase cost of a new Canadian home is comprised of government taxes and fees. On an average priced new home, a buyer will pay over $380,000 in taxes and fees(!).
With that said, Debbie Cosic, CEO & Founder at In2ition Realty, says there’s been 'some' uptick in activity in a few Greater Toronto Area (GTA) sites since the rate drops, with buyers showing renewed interest and stepping forward. “Communities like our Menkes South Oakville site that features 37 detached homes have experienced great success over the last few months, as well as The Wilde, a 30-storey condo development, which recently launched but has also been bundled with a series of wonderful buyer incentives,” says Cosic. “The recent rate drops have certainly helped restore a degree of purchaser confidence, but not to the extent required for a significant market shift. While one might optimistically estimate a 10% increase in activity, the overall impact remains modest. There is movement, but it is still relatively limited."
Beyond the advantage of lower borrowing costs increasing purchasing power, further rate drops could have a profound psychological and practical impact on the pre-construction condo market, says Cosic. “Reduced rates not only make financing more accessible, but also instil greater confidence in both investors and end-users, encouraging them to commit to purchases earlier,” says Cosic. “Additionally, developers may find it easier to secure project financing, leading to more launches and a healthier supply pipeline. In a market where timing and affordability are key, sustained rate reductions could accelerate demand, creating renewed momentum in pre-construction sales."
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Beyond Interest Rates
Of course, beyond interest rate fluctuations, there are other socioeconomic factors that have an impact on the real estate market – everything from the federal election, to tariffs and government regulations. Let’s not forget that home prices – especially in the country’s largest cities – aren’t exactly the most attainable. Lyall points to TRREB data, in which people were asked their reasons for not purchasing a home. In the fall of 2022, 17% of respondents cited an inability to afford a home. Interestingly, this figure nearly doubled by the following year, reaching 33% in fall 2023.
“Broader economic conditions, including employment rates, wage growth, and consumer confidence, also directly influence purchasing behaviour,” says Cosic. “Government policies continue to play a significant role, particularly when it comes to housing affordability and accessibility. Easing the mortgage stress test, extending amortization periods, and introducing targeted tax incentives could provide much-needed relief for buyers. The conversation around tariffs being imposed by the US on Canada as a factor that will undoubtedly influence our economy and ultimately our real estate market. Relying solely on rate reductions to stimulate demand overlooks the broader complexities of the market.”
CMHC's Hughes highlights that Canada is likely to see around 1.2 million households renewing their mortgages in 2025, 85% of which contracted their mortgage at a lower rate and will face higher rates when they renew. “In a ‘normal’ situation where the economy is relatively balanced and growing, that’s not necessarily going to spell an immediate catastrophe because people are working, their equity [has] gone up, they have savings,” says Hughes. “So there can be some restructuring. The risk is that the imposition of tariffs could impact certain regions to such an extent that you would see demand for certain industries go down quite fast and radically that would bring about temporary plant closures and layoffs. Obviously, employment is a huge factor of consideration for financial institutions.”
While he acknowledges that it’s hard to ignore the tremendous potential for politics to impact the market in 2025, GVR's Lis emphasizes that the key word is “potential.” While things like tariffs and changing political parties can impact the market in varying ways, Lis says these aren’t always negative. “For example, bad news for the Canadian economy could result in much lower borrowing costs if the Bank of Canada lowers rates aggressively in response to weakening growth – the question is always which effect dominates the market, and that is very difficult to predict,” he says.
Despite this climate of uncertainty, Corcoran's Lake points out how, throughout history, there have always been challenging external forces that impact the real estate market. “In the late 80s early 90s, interest rates were 18% for mortgages, which was significantly due to high inflation,” she says, “People still purchased homes during that time.”
