As we tread through the first month of 2025, economists are busy forecasting the trends set to characterize the new year. Top of mind is the housing market, and more granularly, the mortgage realities that will drive it.
In particular, Director and Senior Economist for BMO Capital Markets Robert Kavcic is predicting that mortgage rates will hover at — or even dip below — 4% as the year unfurls, which would be a testament to the Bank of Canada’s continued easing of its monetary policy.
To recap: the BoC lowered the policy rate five times in 2024, including by 50 basis points in both October and December. We are ringing in 2025 with a policy rate of 3.25%, which is the lowest it’s been in over two years. Moreover, economists across the board are forecasting further easing in 2025.
READ: What’s In Store For Interest Rates In 2025, According To Every Big Bank
“There is scope for some further Bank of Canada easing in 2025, but most of the rate-cut cycle is complete. We officially see 75 bps of rate cuts this year spread out through September,” Kavcic writes in an outlook shared on Friday. “Importantly, the market has long priced this easing cycle into 3- and 5-year fixed mortgage rates, which have been sitting in the low-to-mid-4% range.”
“The market is currently pricing in roughly 50 bps of Bank of Canada easing in 2025, which suggests that these fixed rates could be bottoming out,” Kavcic adds. “There is room for variable rates — currently around 4.7% — to test the 4% level, which would be an important psychological and valuation barrier, but the Bank will have to continue easing.”
All said and done, BMO’s assumption is that, “mortgage rates of around 4% should be the norm for some time” — however, that’s “barring a major disruption on the macroeconomic front,” such as risks posed by tariffs imposed by the US government.
The Feds’ new mortgage rules, which kicked in mid-December, will have a part to play in putting the market into a higher gear, Kavcic says.
“Most notable are an increase in the price cap for insured mortgages, from $1 million to $1.5 million, which effectively reduces downpayment requirements in that price range; and an extension of 30-year amortizations to all first-time buyers (as well as buyers of new homes),” he explains. “Given that most low-end single-family homes and larger (e.g., 2+ bedroom) condos in the bigger cities have pushed into this price range, we should see some impact.”
Will 2025 Be Investor Friendly? There’s Doubt
The Feds’ mortgage reforms stand to improve sentiment from the buyer’s vantage point, but in terms of the overall market, there may be repercussions that aren’t so favourable in the grander scheme of things. In fact, Kavcic points out that the Feds’ changes “are helping to push valuations back into manageable territory rather than making them outright attractive.”
As Kavcic gets at, softer valuations will bode well for homebuyers — and especially, new homebuyers — allowing for more to etch their place in the market. “In fact, if we plug 3.9% mortgage rates and a 30-year amortization into our affordability calculator, we get back into the realm of what was sustained pre-pandemic, assuming prices remain at current levels,” he notes. “In other words, if the interest rate outlook is correct, and incomes continue to grow at a solid clip in excess of inflation, there’s still only room for prices to rise modestly without again running into affordability constraints.”
However, for investors, the cap-rate-math may not jive. “For investors, the arithmetic surrounding cap rates, borrowing costs and risk-free returns is still not compelling, although not the complete turnoff it has been over the past year,” Kavcic says. “Expectations of outsized price growth have also vanished.”
Looking at cash flow alone, sure, sub-4% borrowing costs will allow more buyers to enter the market. But using Toronto’s market as an example, Kavcic points out that “new investors would have been deeply cash flow negative through late-2022 and 2023, even failing to pay down any principal for a short period.”
“While valuations are hardly attractive yet — the spread between 4.5% cap rates and risk-free GoC yields is still tight — lower mortgage rates and the decline in home prices have set conditions back into the realm of what used to be reasonable,” he adds.
“Even so, we suspect investors will remain shy given limited near-term capital gains potential, lack of liquidity, economic uncertainty, tougher tax treatment (versus dividends), difficult landlord-tenant conditions and a much weaker rent backdrop. Valuations would need to push to the attractive side of the spectrum to account for these factors and bring investors back into the market more significantly.”
