Changes to rules for first-time buyers could significantly enhance housing demand next year
Strong forces may power the housing market higher in 2025, driven by falling interest rates and changes to mortgage rules.
TD economist Rishi Sondhi, in an article by The Globe and Mail, notes that the Bank of Canada has reduced its overnight lending rate by 75 basis points this year, with further cuts expected
Inflation fell to the Bank's target of 2 percent in August, and with the US Federal Reserve's recent 50 basis point cut, the Bank of Canada may follow suit if economic conditions weaken.
Recent changes to mortgage rules, including raising the cap for insured mortgages and extending the 30-year amortization period for first-time homebuyers, could further boost the market.
TD Economics recently updated its forecasts, predicting a strong housing market next year.
The Bank of Canada’s rate-reduction cycle is expected to contribute to this strength, with TD forecasting a total of 200 basis points in cuts:
- 50 basis points in Q4 2024
- 125 basis points in 2025
- 25 basis points in Q1 2026.
This would reduce the overnight rate from 4.25 percent to 2.25 percent.
In 2025, TD anticipates annual average existing home prices will rise between 3.6 percent and 7 percent across Canada, with the most significant increases in the Prairie provinces and Ontario.
Specifically, Alberta's prices may rise by 7 percent, while Saskatchewan and Manitoba could see increases of 6.2 percent and 6 percent, respectively. In Ontario, home prices are expected to recover with a 4.6 percent increase after a projected decline of 0.4 percent in 2024.
Sondhi remarked, “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.”
He forecasted a pickup in home sales by Q4 2024, driven by lower rates. However, he cautioned that sales levels might not return to pre-pandemic figures until 2025.
The Prairie provinces, particularly Calgary, are expected to outperform in home price growth due to strong affordability and economic performance.
Sondhi noted that Alberta benefits from solid population growth and economic activity. He explained, “Affordability is still not that bad by historical standards.”
In contrast, larger markets such as the Greater Toronto Area (GTA) face affordability challenges, which may lead to softer price growth projections.
Sondhi pointed out that the condominium market in Ontario is currently under pressure due to an oversupply, which could result in price concessions to clear inventories.
Discussing the condominium market specifically, Sondhi stated, “In that environment, one would assume that price growth will be a little bit softer.”
He noted that TD's forecast predicts condominium sales returning to pre-pandemic levels by the second half of 2025, which could help balance the market and lead to positive price growth.
While residential delinquencies remain low, the rising unemployment rate raises concerns about mortgage delinquencies and forced sales. However, Sondhi observed that so far, “people prioritize their mortgage payments over everything else.”
The ban on foreign buyers in Canada will lift on January 1, 2027. Sondhi does not expect this change to lead to a significant boom in home prices, noting that foreign buying has historically made up a small portion of the market.
When discussing potential risks, Sondhi identified economic fluctuations as a significant concern. He stated that while TD forecasts economic growth, “interest rates are left too high for too long and that weighs on economic growth more than we expect.”
On the upside, he mentioned the potential for pent-up demand in Ontario and British Columbia, where low sales levels could indicate that buyers are waiting for the right conditions to enter the market.
Sondhi concluded by highlighting a long-term trend in new resale listings, which have remained flat over the past decade, suggesting that the market is tightening year after year. He emphasized that an aging population might contribute to this trend, as older individuals typically move less frequently.
