TD economist Rishi Sondhi.Kathryn Hollinrake/Supplied
Strong forces may power the housing market higher in 2025.
Falling interest rates are a key driver of housing activity. The Bank of Canada has reduced its overnight lending rate by 75 basis points this year with further rate cuts expected. With inflation falling to the Bank of Canada’s 2-per-cent target in August as well as the U.S. Federal Reserve’s recent rate cut of 50 basis points, this opens the door to the Bank of Canada matching this rate cut should economic conditions deteriorate. Furthermore, the federal government’s recently announced changes to mortgage rules, raising the cap for insured mortgages and expanding the 30-year amortization period to first-time homebuyers of resale properties, could give the housing market a boost in 2025.
Last week, TD Economics updated its economic forecasts. With the Bank of Canada firmly in its rate-reduction cycle, the housing market is expected to be strong next year. TD is forecasting a further 200 basis points of cuts: 50 basis points in the fourth quarter of 2024, 125 basis points in 2025 and an additional 25 basis points in the first quarter of 2026, bringing the overnight rate down to 2.25 per cent from the current 4.25 per cent. (There are 100 basis points in a percentage point.)
TD also raised its 2025 home sales and price forecasts for all provinces from its June forecast. In 2025, annual average existing home prices are forecast to rise between 3.6 per cent and 7 per cent across the 10 provinces with the strongest growth expected for the Prairie provinces and the greatest improvement seen in Ontario. Annual average existing home prices are anticipated to expand by 7 per cent in Alberta, 6.2 per cent in Saskatchewan and 6 per cent in Manitoba. In Ontario, the housing market is expected to recover with annual average existing home prices rising 4.6 per cent, up from a decline of 0.4 per cent anticipated in 2024.
To gain greater insights on the Canadian housing market, The Globe and Mail recently spoke with TD economist Rishi Sondhi.
In the spring of 2023, home prices jumped after the Bank of Canada paused on raising interest rates. This year, we’ve had three rate cuts announced by the Bank of Canada, yet we’re not seeing that same enthusiasm by home purchasers.
Our forecast has home sales picking up in the fourth quarter of this year. By the fourth quarter, we think there should be enough stimulus in the system by way of lower rates to start generating some increases in sales. We’re not talking about high sales levels, we’re just talking about increases off a low base. Our forecast doesn’t anticipate sales levels returning to where they were before the pandemic struck before 2025.
There’ll probably be enough rate relief in the system to generate some sales gains moving forward, but we don’t think that the actual level of sales will be that strong. It’ll take into next year before we get back to where we were before the pandemic struck.
What cities will experience the greatest rise in home prices over the next year or two? Is it still going to be Calgary and Edmonton?
We think the Prairie provinces could have some outperformance still in 2025. For example, Calgary is a bit of a standout with respect to how hot its market is. There’s lots of supportive factors going for Alberta at the moment. Affordability is still not that bad by historical standards. They have economic outperformance. They still have robust population growth. So, the federal government has been announcing changes to slow the rate of intake from non-permanent residents. Well, one of the things that they’re doing is they’re trying to slow the intake of students, but the way in which it’s calculated, that’s not actually going to apply that much to Alberta. Alberta still has room to absorb more foreign students this year, which is different than other jurisdictions. And its interprovincial migration is still quite robust. So, it’s a very solid story there.
We can foresee relatively strong price growth taking place in other parts of the Prairies, for example, Saskatchewan, and that’s just a function of good affordability. There’s upside there because housing is frankly just affordable.
Whereas, in the larger jurisdictions, the Greater Toronto Area (GTA), Vancouver, B.C.’s Fraser Valley, affordability is quite stretched. In fact, it’s historically stretched. And in that environment, one would assume that price growth will be a little bit softer and that’s what our projections say for next year.
Now, one nuance that I’ll point out for Ontario is that its condo market is under some pressure right now. There’s a mismatch between supply and demand. There’s a lot of supply in the market right now and sales are depressed. Typically, what happens when you have that environment is you have price concessions in order to clear those inventories. We think that the weakness in the condo market that we’re seeing in the GTA right now will probably force some downside with respect to condo prices over the next few months or so. So that will be yet another factor that weighs on Ontario vis-à-vis other jurisdictions in the country.
Let’s talk about the condo market in the Greater Toronto Area. There’s a lack of sales activity with rising inventories and low demand. When will the condo space become a more balanced market?
We published a forecast for condo sales earlier this month. In that forecast, we had condo sales picking up to their prepandemic level in the second half of 2025, so that will help balance the market. And that’s probably when you see some positive price growth take place. Positive price growth is consistent with balanced market conditions.
Is a balanced market typically characterized by price growth of between 2 and 4 per cent?
On average, you’ve seen condo prices go up about 1.6 per cent in a given quarter, if you annualized that, that’s around 6 per cent growth on average. In this environment, that would seem a little high to hit given how affordability has deteriorated. So, I would say a balanced market would be more consistent with price growth that’s a little bit lower than that, 4 per cent I think is reasonable.
With the unemployment rate rising, what trends are you seeing in mortgage delinquencies and forced sales? And how do you see this playing out in 2025 and 2026 when many mortgages reset at higher rates?
Arrears have ticked up relative to the lows of 2023. Residential delinquencies, they’re still pretty low and they’re still well below historic averages. So far, we’re not seeing much concern in that respect. And I would say that goes with the story that people prioritize their mortgage payments over everything else.
Foreigners are currently banned from purchasing residential property in Canada. The ban will be lifted on Jan. 1, 2027. Looking ahead, do you think that will lead to a boom in home prices?
I do not. Just like banning foreign buyers didn’t lead to a bust in home prices, it’s very much the same thing. They’ve had a wealth of these bans and taxes on foreign buying in Ontario and B.C. for many years.
The data that we have indicates that foreign buying as a share of the overall market is quite low and B.C. is a good example, provincial data would point to it being less than 1.5 per cent of the market so they’re not really going to move the dial with respect to price action.
What do you see as the greatest risk or risks facing the housing market?
So, downside risk would probably be how the economy evolves over time. Our forecast is for economic growth to pick up. But it could be the case that interest rates are left too high for too long and that weighs on economic growth more than we expect. You could see additional labour market weakness, more than we anticipate, which could damage housing markets.
On the upside, there is pent-up demand. We estimate that there is pent-up demand in markets like Ontario and B.C. where sales levels are low, particularly Ontario where per capita sales are hovering around lows last seen during the first wave of the pandemic, the depths of the global financial crisis and the large downturn in the GTA housing market that took place in the late 80s to mid-90s. Against that backdrop, we think that there’s probably some pent-up demand. That pent-up demand could be greater than we estimate or could be satisfied or could return to the market faster than we anticipate, amid falling interest rates, which would push up prices and sales quicker than we think.
Are there any trends that you’re taking note of that might become increasingly talked about in the future?
When you look at the absolute level of new resale listings, they’ve been up recently because of cyclical weakness but when you look at them over a long period of time, they’ve basically been flat for over a decade now. And on a per capita basis, the trend for new listings is definitely down, that suggests that the market is getting tighter year-on-year. Part of that could be because the population is getting older and an aging population tends to move less. So, if the population continues to age, which would be implied by Statistics Canada’s demographic projections, for example, then that could be a factor that continues to structurally weigh on the amount of resale supply that’s delivered to the market.