BMO: Canada housing market set to rebound, but challenges remain

The Canadian housing market is projected to see modest growth in 2025, as outlined in a recent report from BMO analysts. While sales and prices are set to rise, the market remains far from the highs observed in 2022. The analysts noted that factors such as changing demographics, adjusted mortgage regulations, and immigration shifts continue to influence the outlook.

Sales and price forecasts

National home sales are expected to increase by 12% compared to last year’s subdued levels, with benchmark home prices projected to rise by 4%. Despite the improvement, affordability concerns and cautious investment sentiment are expected to temper growth. Regional disparities will persist, with recovering markets in Southern Ontario and British Columbia outperforming others. However, Alberta and Atlantic Canada, which previously outshone other regions, may see slower growth.

Mortgage rates and new regulations

The Bank of Canada’s rate cuts have stabilized mortgage rates, which now hover in the low-to-mid 4% range. Variable rates could dip further, approaching the 4% psychological threshold. Regulatory changes, including increased price caps for insured mortgages and extended 30-year amortizations for first-time buyers, aim to ease conditions, particularly for low-end single-family homes and larger condos in urban areas.

Investor hesitancy and valuation challenges

For investors, the market remains unappealing due to tight cap rate spreads and limited capital gains potential, BMO analysts noted. While lower borrowing costs have made cash flow dynamics less severe, challenges such as economic uncertainty, tax policies, and tenant-landlord dynamics are likely to keep investors cautious.

Rising supply and declining rents

The report anticipates a decline in rents as population growth slows and new housing supply enters the market. Canada’s immigration levels plan has reduced annual permanent resident targets, with net inflows expected to fall significantly. Vacancy rates are likely to rise, and rent reductions are already visible in major cities like Toronto.

A long path to recovery

Returning to 2022 price levels could take years, with current forecasts indicating a recovery by 2029. This protracted timeline reflects the combined impact of demographic trends, reduced immigration, and past interest rate peaks.

Overall, while conditions are improving, the housing market faces a challenging road ahead, analysts said. Factors such as affordability constraints, regional variances, and investor hesitancy suggest a measured recovery, emphasizing the importance of long-term planning for stakeholders.

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