Canada’s Housing Market Faces Decline: Economic Risks Loom

The Canadian housing market is experiencing one of its most challenging periods in decades, raising concerns about broader economic implications. Various factors, including increasing interest rates and a decline in foreign investments, have led to a significant drop in property sales and prices. Analysts warn that a prolonged downturn could adversely affect jobs, government revenues, and the financial system’s stability.

Holly Calderwood, a real estate professional with over two decades in Vancouver, notes that the current market conditions are reminiscent of the 2008-2009 financial crisis. “This year, I’ve seen a lot of foreclosures, and prices are dropping dramatically. Some homeowners are losing millions,” she stated. This shift is marked by a stark increase in the availability of properties for sale in major cities such as Toronto, Vancouver, and Calgary, which have all recorded substantial decreases in sales activity.

The downturn began after the Bank of Canada initiated interest rate hikes to combat inflation following the pandemic. As a result, many homeowners are facing higher renewal rates on their mortgages, further straining their financial situations. According to Robert Hogue, assistant chief economist at the Royal Bank of Canada, home resales are projected to decline by 3.5 percent in 2025, totaling approximately 467,100 units. This decline is primarily concentrated in Ontario and British Columbia, where affordability challenges have intensified.

Charles St-Arnaud, chief economist at Alberta Central, emphasizes that interest rates have experienced a structural shift, making homeownership unattainable for many who could previously afford it. He points out that mortgage rates are currently 150 basis points higher than during the decade prior to the pandemic, impacting buyers’ purchasing power significantly. “Prices are stagnating because potential buyers cannot afford to overbid,” he explained.

Economic Impact and Government Responses

The housing sector is vital to Canada’s economy, contributing approximately $143.4 billion and supporting around 1.2 million jobs last year. Each home purchase often leads to increased spending in related sectors, such as home improvement and appliances. As St-Arnaud noted, “When the housing market thrives, so does the economy.”

Despite the negative trends, Canadian Housing Minister Gregor Robertson has stated that a decrease in housing prices is not a desired outcome. “We need to deliver more supply to ensure market stability,” he remarked during a recent press conference. This sentiment highlights the delicate balance policymakers must maintain in restoring housing affordability while fostering a stable investment environment.

The Canadian housing market peaked in mid-2022, but the subsequent decline reflects broader economic uncertainties, including international trade tensions and rising construction costs. With many markets now experiencing an oversupply of properties, the potential for price corrections remains high.

In the Greater Toronto Area and Vancouver, condominium sales have plummeted by 75 percent and 37 percent, respectively, since their pandemic peaks, according to the Canada Mortgage and Housing Corporation (CMHC). Ron Butler, a mortgage broker, expressed concern over the long-term viability of investors who purchased properties at inflated prices. “Many will not see a return on their investments, and some projects have gone into receivership,” he noted.

Future Projections and Market Dynamics

The recent slowdown in population growth following record immigration levels has compounded the housing market’s challenges. Economists believe that the previous surge in newcomers had masked underlying economic weaknesses. The combination of immigration restrictions and an influx of rental properties has further pressured rental prices, with average national rental costs decreasing by 3.6 percent year-over-year.

While some regions, such as Quebec, are showing resilience with stable price movements, others, particularly in Southern Ontario and British Columbia, are experiencing significant price drops. For instance, prices for condominiums in surrounding suburbs of Toronto have decreased by up to 50 percent from their peak. The average home price in Canada reached $691,634 in June, a notable increase from $505,500 in June 2019.

As the housing market continues to adjust, the threat of increased mortgage defaults looms large. The Bank of Canada’s financial stability report warned that if trade tensions persist, the share of mortgages in arrears could rise to levels comparable to those seen during the 2008 financial crisis. Currently, about 60 percent of Canadian mortgages are set to renew in 2025 or 2026, with many homeowners expected to face increased payment obligations.

While the unemployment rate remains steady at 6.9 percent, slow hiring trends raise concerns about future economic stability. Employment in the construction sector has already seen a decline, with significant job losses reported in July. “The key risks for mortgage defaults are linked directly to unemployment,” Butler cautioned.

In summary, the Canadian housing market is undergoing a significant transformation, with decreasing prices and sales activity posing risks to the overall economy. As stakeholders navigate these turbulent waters, the potential for a future housing crisis remains a pressing concern that could impact economic growth and stability across the nation.