Navigating Canada’s Housing Market Amid Inflation and Interest Rate Changes
As of September, Canada’s inflation rate has dropped to 1.6%. When excluding mortgage interest and rent, Canada is teetering on deflation. Key factors like auto insurance premiums and energy costs have helped drive inflation lower, creating a unique economic landscape. This is an important development for homebuyers and sellers as it directly influences interest rates and the housing market.
Why This Matters for Homebuyers and Sellers
With inflation now below the Bank of Canada’s 2% target, there’s growing pressure to reduce interest rates, making it more affordable to borrow. Many mortgages will be up for renewal in 2025, and experts expect the Bank of Canada to cut rates, potentially back-to-back 50 basis point drops in October and December of this year. As we head into 2025, the overnight rate could very well drop by 25 basis points at a time until it reaches 2-2.25%, which would significantly impact mortgage costs.
How Interest Rates Influence Home Prices
Lower interest rates directly affect the housing market, making mortgages more affordable for homebuyers. However, even though rates have started to drop, home affordability remains a challenge. Many buyers are still feeling the effects of skyrocketing home prices and higher rates during the pandemic.
In recent months, the Canadian real estate market has seen some stability. Home prices have remained flat, and sales activity has yet to fully take off, despite improved borrowing conditions – although they are on a decline, interest rates are sitting at a level we have not seen in over a decade. Buyers are likely waiting for further rate cuts, knowing that affordability will improve as rates drop.
MLS® Home Price Index by Property Type
Source: MLS® Systems
Key Changes to Support Buyers
Several upcoming federal measures are designed to give buyers more flexibility:
- 30-Year Amortizations: First-time homebuyers will soon be able to opt for 30-year amortizations on insured mortgages, lowering monthly payments.
- Increased Mortgage Caps: The maximum qualifying home price for insured mortgages will increase from $1 million to $1.5 million. This is particularly beneficial for buyers in high-demand markets like Toronto and Vancouver, where home prices tend to exceed the current limit.
See our recent blog post for more information.
What to Expect Moving Forward
Looking ahead, we anticipate a surge in housing activity, particularly in 2025, as these new measures take effect and more interest rate cuts are expected. Home prices in Ontario, where homes are generally more expensive, are poised to grow. However, the condo market in the Greater Toronto Area could see a cooling period due to oversupply, keeping prices in check.
Canadian Housing Market: When a Trickle Becomes a Flood
If you’re a homebuyer or seller, these changes mark a crucial opportunity. Lower interest rates and new federal measures could make homeownership more accessible in the coming months, but it's also important to stay informed and plan strategically based on your specific needs and market conditions.
Sources:
Don’t stop me now – rate cuts to multiply from the BoC, ECB and the BoE - RBC Thought Leadership
TD Economics - Latest Forecast Tables
TD Economics - Canadian Housing Outlook: When the Trickle Becomes a Flood
