Canada's housing market recovery hinges on rates and supply, TD says

Canada’s housing market is expected to see a moderate increase in home sales in 2025, supported by pent-up demand, looser mortgage rules, and declining interest rates, according to TD Economics.

However, the bank’s latest housing market outlook warns that price growth may remain sluggish, particularly in British Columbia and Ontario, where market conditions currently favour buyers.

“The stars have been aligning for at least a moderate advance in home sales activity in 2025,” TD Economics said. “Positive factors include pent-up demand, looser mortgage rules, a rising share of Canadians in their prime home-buying years, continued economic growth and falling interest rates.”

While these factors suggest stronger market activity ahead, TD Economics cautioned that ongoing affordability challenges, an oversupplied condo market in the Greater Toronto Area, and uncertainty surrounding US trade policies could slow momentum.

The looming possibility of US tariffs is already having an impact on homebuyer sentiment.

“Even the threat of US tariffs already appears to be weighing on homebuying confidence,” TD noted in its forecast. “Sales slumped in January while new listings surged, as buyers were anxious, and sellers hurried to list their properties ahead of potential economic softness.”

If steep tariffs are imposed, TD Economics warned that job market weakness and declining consumer confidence could further dampen housing demand and price growth. These effects would be particularly pronounced in high-cost markets already struggling with affordability constraints.

However, the report also suggested that lower interest rates could help offset some of these headwinds.

“The Bank of Canada is also likely to cut interest rates faster in a tariff scenario, providing some offset to the housing market,” TD wrote.

South of the border, the US housing market is facing similar pressures, with persistently high mortgage rates slowing momentum. Pending home sales and weekly mortgage applications have started to decline, with 30-year mortgage rates hovering around 7%, roughly 80 basis points higher than when the Federal Reserve began cutting rates in September.

TD Economics also noted that “lower mortgage rates in the spring and summer of last year delivered a late-year boost to residential investment,” but added that “the backup in bond yields is likely to slow the sector’s momentum in the near term.”

With 30-year mortgage rates hovering around 7%, housing affordability remains well below historical norms. “At these levels, the typical mortgage payment for an existing single-family home is close to $2,200 – more than double the pre-pandemic average,” TD Economics stated.

Despite a 23% rise in median family incomes since the pandemic, affordability remains stretched. TD Economics forecasts that while affordability is expected to improve somewhat over the next three years, it is still likely to remain below long-term averages.

Looking ahead, TD Economics anticipates that lower borrowing costs in the second half of 2025 will help stabilize the housing market. However, it emphasized that a full recovery depends on increased home construction to ease affordability pressures.

“But a lasting revival requires homebuilding to move the needle on affordability,” TD Economics stated. “The hope is that an improvement in homebuilding trends—aided by a lower interest rate environment and perhaps reduced regulation—can suppress home price growth and allow incomes to catch up.”

The bank cautioned that construction activity could be hindered by rising costs, labour shortages, and potential import tariffs on building materials.

“For the near-to-medium term, other risks dominate, including import tariffs on lumber and other inputs combined with immigration restrictions that can create labour shortages,” TD Economics warned.

Source CMP
By Candyd Mendoza