Canadian real estate watchers are expecting home prices and housing activity to rise in 2025 after a “recovery year,” but the Bank of Canada’s policy rate will still have sway over how quickly buyers come back.
Royal LePage released its 2025 housing outlook on Thursday, forecasting the aggregate price of a home in Canada will hit $856,692 in the fourth quarter of next year, a 6.0-per cent year-over-year hike.
For the single-family detached market, prices are expected to rise 7.0 per cent annually to just over $900,000. Condos meanwhile are forecast to increase 3.5 per cent year-over-year to $605,993.
More affordable housing markets are expected to see the most sizeable gains next year, led by Quebec City (up 11 per cent), Edmonton and Regina (both up nine per cent). Montreal is forecast for 6.5-per cent growth, outpacing the metropolises of the greater Toronto (up 5.0 per cent) and Vancouver (up 4.0 per cent) areas.
Royal LePage CEO Phil Soper told Global News that 2024 was a “recovery year” for Canada’s housing market, and conditions are now ripe for normalized growth in sales activity and home values come 2025.
Reflecting back on the brokerage’s 2024 predictions, Soper said Royal LePage was right when it came to the economy avoiding a recession and that home prices would not drop across the board.
“Where we did not hit the mark was on the pace of recovery,” he said.
The disconnect, from Soper’s point of view, is in how Canadians reacted to the start of rate cuts from the central bank midway through 2024.
The Bank of Canada’s policy rate now stands at 3.75 per cent after 1.25 percentage points of easing since June. The benchmark rate broadly sets the cost of borrowing in Canada and is a key input in lending rates Canadians can get on their mortgages, which in turn affects how much home they can afford to buy.
Soper said it took four interest rate cuts from the central bank — the last one in October an oversized step of half a percentage point — before Canada saw a “material change” in the market.
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Early reports of November housing activity in major centres such as Toronto and Vancouver show a surge in sales last month, Soper said.
Soper said he believes that first-time buyers, who have been largely boxed out of buying a home thanks to tight affordability conditions in many markets across Canada, have decided to jump off the sidelines in the final quarter of 2024.
He argued that these buyers have now seen enough easing in borrowing costs to get into the housing market. And rather than wait for another hopeful rate cut or two to drive down their mortgage costs further, some buyers are looking to take advantage of a slower market to score a better price and potentially put conditions on their purchase, he said.
“We’re in a rare time, particularly in our big cities where there are no bidding wars, where you can make an offer conditional on a home inspection, on financing, on potentially even selling your property before you buy theirs,” Soper said.
“These have almost been completely removed from our big city markets in the last couple of decades because of the acute housing shortage in the country.”
The Bank of Canada has indeed signaled that its key rate may have further to fall as it shifts from a restrictive monetary policy stance aimed at taming inflation to a position that could stimulate economic growth again.
Economists widely expect another rate cut at the Bank of Canada’s final decision of the year on Dec. 11 and more through 2025 as the central bank seeks a more neutral level for its policy rate.
Christopher Alexander, president of Re/Max Canada, said he worries the prospect of even lower rates will become a “psychological” barrier for some would-be homebuyers.
Re/Max Canada said in its 2025 housing outlook released in late November that it’s also expecting annual price gains of around five per cent next year.
But Alexander told Global News that with clear messaging from the Bank of Canada that interest rates have lower to go, buyers can end up stuck in a cycle of waiting for more, even if they can afford a home today.
“That’s a tricky place to be because the more rates come down, the more competitive the market will get. And there will come a stage where it gets competitive again. available inventory will start to dry up and we will see upward pressure again on pricing,” he said.
Alexander said he thinks it will be helpful for the housing market when the Bank of Canada signals it’s reached a possible bottom for its policy rate, giving Canadians clarity on where borrowing costs will be for the foreseeable future.
Others argue that the mortgage landscape is not likely to change much from its current state, even as the Bank of Canada continues to cut its policy rate.
John Pasalis, president of brokerage Realosophy Realty in Toronto, explained in a recent interview with Global News that what Canadians are actually paying on their mortgages “will not change that much” over the next year.
Fixed mortgage rates in the market are based on yields in the bond market, which are derived from bets on where the Bank of Canada’s key rate is headed over the coming years. Expectations for future cuts are therefore already priced into the market, Pasalis noted, and likely won’t drop much further as those rate reductions materialize.
And while variable-rate mortgages do respond directly to the Bank of Canada’s moves, those rates are already higher than their fixed counterparts, Pasalis said.
“Yes, variable rates might come down to a level that is closer to what fixed rates are. But overall, it’s not like you’re going to be that further ahead four months from now,” he said. “We’re still probably going to be close to the four-per cent range on a mortgage.”
But like Alexander, Pasalis said there’s a mental element to expecting interest rates to come down that can keep buyers sidelined as borrowing costs continue to fall.
“I don’t think we’re going to see a huge difference. But I think there is this behaviour in the psychology of, people think it’s going to be better.”