TD Bank predicts short-term gains from new rules, but long-term affordability could erode housing recovery
New federal mortgage rule changes are expected to lift Canada’s housing market in the short term, but the long-term outlook shows affordability may take a hit, according to a new analysis by TD Economics.
The study, conducted by TD economist Rishi Sondhi, predicts that home sales and prices will rise by 2-4% by the end of 2025, driven by these new policies.
The upcoming rule changes, set to take effect in mid-December, include raising the maximum price for insured mortgages from $1 million to $1.5 million and extending the amortization period to 30 years for first-time buyers and purchasers of new homes.
These policies are designed to make housing more accessible to buyers in high-priced markets. However, Sondhi said that while they will provide a “secondary tailwind” to the market, they won’t trigger a housing boom.
“By the end of 2026, the affordability erosion resulting from these policies will have eaten away at the initial lift to sales, and leave prices only marginally above whether they would have been otherwise,” Sondhi wrote.
In other words, the temporary relief could be overshadowed by affordability issues down the line.
“Blunted” impact
The analysis highlights that affordability remains a critical issue in Canada’s housing market, driven by a mix of factors including population growth, slow construction rates, and inflation.
While inflation has started to cool, housing costs continue to be a significant contributor to overall inflation levels, with Desjardins economist Randall Bartlett noting that shelter inflation remains the largest driver of headline inflation.
The policy allowing a 30-year amortization period is aimed at making homeownership more accessible for first-time buyers. However, the TD report suggested that its impact may be limited because it only applies to insured mortgages, which currently make up just 20% of the mortgage market.
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Sondhi noted that while this share could increase following the policy changes, the overall effect may be “blunted.”
“Moreover, a relatively small 20% of mortgages issued this year have been in the insured space, although we acknowledge the likelihood of a probable increase in this share in the wake of these policy changes,” he added.
High-priced markets to benefit most
Raising the insured mortgage cap to $1.5 million is expected to have the greatest impact in high-priced markets like the Greater Toronto Area (GTA) and Vancouver.
In the GTA, where the median home price is around $1.2 million, many buyers could benefit from the expanded cap. However, in Vancouver, where home prices often exceed $1.5 million, the impact may be more limited.
The TD report also pointed out that higher home prices will require higher household incomes to qualify for mortgages with a minimum down payment. For example, buyers of a $1.05 million home would need a household income of around $170,000 to $180,000 to meet standard qualification requirements, a barrier for many first-time buyers.
“This would be difficult for many first-time homebuyers,” the paper said.
The timing of these new rules and their effect on market activity could vary. Some buyers may hold off on making purchases until the new policies are in effect, delaying a boost in sales. On the flip side, further interest rate cuts could fuel more significant activity than currently projected.
However, Sondhi’s analysis also pointed to potential risks. He cited a Bank of Canada research suggesting that borrowers with high loan-to-value ratios are more likely to face delinquency. Additionally, extending mortgage terms through longer amortization periods could lead to greater financial stress for homeowners over time.
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