The Canadian housing market could see more action in 2025, following a period of persistent challenges including higher interest rates, a quickly growing population and the pressure that puts on our housing market), on top of a housing shortage that has existed for decades. We’ve already seen lower interest rates spark increased activity in the market. The pent-up demand is palpable, but the inventory of homes is likely to get scooped up fast. If you’re feeling like you can’t get a foothold in the housing market, there are a few reasons for that.
Issues Impacting Affordability
Price Appreciation
Affordability remains, by far, the greatest barrier to ownership in the Canadian housing market. With the average price of a home in most Canadian markets more than doubling between 2006 and 2021, first-time buyers are falling through the cracks. Rental rates that remain above historic levels, the high cost of living, and wages that have not kept pace with price growth pose a serious challenge to buyers who are trying to save a downpayment – which is almost impossible for some buyers, even with steady, well-paying jobs. The dream of home ownership is eroding further and faster than their ability to save.
Mortgage Stress Test
In additional to the downpayment, qualifications for potential buyers include being able to carry costs at a rate two per cent higher than the posted rate. Rolled out in 2018, the Office of the Superintendent of Financial Institutions (OSFI) stress test hampered home-buying activity in virtually all markets across the country. A once-in-a-lifetime event—the pandemic—supercharged the nation’s housing markets in late 2020 when the Bank of Canada dropped the overnight rate to 0.25 per cent, to withstand the economic impact on the county. With the conditions that necessitated intervention no longer at play, the need for government to police prospective homebuyers is a duplication when banks and lending institutions already have mechanisms in place to do just that. The stress test has outlived its usefulness and is unnecessarily inhibiting capable, entry-level purchasers.
Cost of Living and Renting
Those hoping to enter the Canadian housing market for the first time have been caught in the middle, unable to afford to buy as they continue to rent at rates that on par with mortgage carrying costs in many cities. According to Ratehub.ca, the cost of carrying a $600,000 unit in the Greater Toronto Area would be approximately $2,665 monthly, based on a 10-per-cent downpayment of $60,000, with a five-year, fixed rate mortgage of approximately 4.1 per cent and a 30-year amortization period—only slightly higher than the average cost to rent a one-bedroom apartment in Toronto.
Demand for rental units accelerated between 2022 and 2024 amid housing supply challenges and as purchase prices surged. The result was tight rental market conditions, upward pressure on rental rates, and even fewer options for those seeking housing.
Taxes and Closing Costs
Saving a downpayment is difficult enough, amid the obstacles of high house prices and rents that are above historical averages. When you factor in additional costs such as municipal and provincial land transfer taxes as well as closing costs, there’s no question that these are yet another barrier pinching out buyers. The longer they must save, the more at risk they are of having price growth outstrip their ability to save. Toronto homebuyers are the only buyers in the country subject to double land transfer taxation at both a provincial and municipal level. Halifax implemented its own version of buyer’s tax, while Hamilton is mulling the decision to launch its own land transfer tax. As the associated costs of homeownership climb, Calgary continues to experience strong migration, thanks in large part to its affordable housing and it’s no land transfer tax policy at both the municipal and provincial level.
Wages Not Keeping Pace
Inflation began picking up in early 2021 and peaked in June 2022, at 8.1 per cent. It started to ease in late 2022 as gasoline prices fell. However, key sources of inflationary pressure such as food and shelter show little signs of moderating.
As inflation ramped up in 2022, Canadians reported that they were most impacted by rising food prices, followed by higher transportation and housing costs. In April 2022, nearly three in four Canadians reported that rising prices were affecting their ability to meet day-to-day expenses, while three in 10 Canadians were very concerned about whether they could afford housing or rent. By fall 2022, almost half (44 per cent) said they were very concerned about their household’s ability to afford housing or rent, while one in four Canadians said they were unable to cover an unexpected expense of $500. One reason why Canadians are struggling is that wages and earnings have not kept pace with price pressures, especially those related to food and shelter. (Source: Statistics Canada)
According to RBC, wages have been growing steadily in 2024. However, many Canadians are still feeling the pressure. Why? The top 40 per cent of income earners have taken home 70 per cent of wage growth over the last three years. Household spending on a per-person basis is down. And while low- and middle-income Canadians have devoted more of their pay to essentials like food and shelter, the highest-income earners continue to amass significant savings. The Bank of Canada’s interest rate hikes have contributed to that divergence. Steeper rates have increased the debt load of low- and middle-income households with mortgages or other loans. Meanwhile, people with higher incomes have been earning higher returns on their savings.
Downpayment
Many would-be participants in the Canadian housing market can afford the monthly carrying costs of a mortgage, which in many cases is similar to rent. However, other factors are weighing on their ability to amass a downpayment, including high house prices (which are anticipated to rise in 2025), high cost of living, taxes, rental rates above historical averages and wages that have not kept pace. In some case, some are getting a helping hand from parents and grandparents, but those without access to generational wealth and those in lower income brackets are experiencing significant obstacles to home ownership, including the OSFI stress test.
Issues Impacting Availability
Shortage of Supply
Construction of affordable housing stock has seriously lagged over the past two decades, according to the Social Housing Supply Mix Strategy 4A Report by Toronto Metropolitan University, City Building, University of Toronto, and School of Cities. The country was able to build 45,000 federally assisted affordable units in 1971 alone, but it took almost 25 years to build the same number of properties between 1995 and 2019. Builders and developers are eager to get shovels in the ground, but projects need to be financially viable to proceed. Constraints include high land costs and development fees, zoning restrictions, lengthy approval processes and other red tape.
Furthermore, there’s a disconnect between what is being built and buyers’ needs. Smaller units are overwhelming the market, when more spacious product is desperately needed to support urban family living. Municipal, provincial and federal governments must move quickly to revise their housing plans that have long focused on greater density to ensure that the new housing mix matches the needs of residents.
Population Growth
Population growth has both underscored and exacerbated undersupply in the Canadian housing market. Looking ahead, housing gaps exist in relation to projected population growth. While Canada has eased immigration levels, the significant shortfall in housing is likely to persist.
Between 2006 and 2021, Statistics Canada Annual Demographic Estimates reported the country’s population climbed by 17.4 per cent. That’s 5,668,671 more residents. The Calgary CMA reported the greatest growth in population during the same period, rising by 36.8 per cent (414,693), followed by Vancouver at 26.5 per cent (581,381), Ontario’s Ottawa-Gatineau region at 26 per cent (244,058), Toronto at 21.3 per cent (1,136,564), Halifax at 18.2 per cent (74,369) and Hamilton at 13.6 per cent (98,138). If you factor in the accelerated growth that occurred between 2021 and 2024, when further double-digit increases were recorded in Vancouver (+12.2%), Calgary (+15.5)%, Ottawa (+8.7%), Toronto (+9.8&), Hamilton (+5,2%) and Halifax (+10%), the strain on the Canadian housing market is palpable. Statistics Canada’s medium growth projections predict the population could reach 52,439,600 by 2050. That’s an increase of 27.8 per cent.
Policy, Zoning, City Planning/Development Issues
Development costs and municipal charges also need to be addressed in major urban centres, including Toronto, where they have risen to their highest level on record at $189,325 per low-rise unit in 2022, up 21 per cent over 2020 levels, according to the Canada Home Builders Association Municipal Benchmarking Study, prepared by Altus Group in October of 2022. Hamilton, with the second-highest municipal charges per unit of $61,431, was up a substantial 49 per cent over 2020 levels, followed by Vancouver which increased $61,414 (up 29 per cent). Ottawa rose 11 per cent to $46,320, while Calgary jumped 15 per cent during the same period, climbing to $42,800. Meanwhile, Halifax had much lower municipal charges per unit at $9,629, but that was still up 41 per cent from 2020, when it was just $6,823.
Policy is also limiting where and what builders and developers can build in cities across the country. Official plans and zoning need to be revisited, along with red tape, approval times, etc. Housing must be prioritized and expedited if we are ever to reverse our nation’s persistent housing issues.
Good policy can serve to foster home ownership. In 2006, for instance, Canada Mortgage and Housing Corporation relaxed mortgage rules for homebuyers. It raised insured amortization periods from 25 to 30 to 35 years to 40 years over a 10-month period and introduced zero-downpayment mortgages and interest-only mortgages (for the first 10 years of the mortgage). The Canadian housing market soared in response, reporting its best year on record in 2007. By July of 2008, Canada began reversing these levers. The amortization period was shortened from 40 years to 35 years, and the requirement for a five-per-cent minimum downpayment was established. CMHC started to roll back home-ownership incentives further in 2012 and established the stress test in 2018. However, it recently announcing that it will extend insured mortgages to $1.5 million for all first-time buyers, while boosting mortgage amortizations back up to 30 years. Is this enough to offset the many other barriers to ownership in the Canadian housing market?
