The Bank of Canada has reduced its benchmark interest rate by 25 basis points to 2.75%, marking the seventh consecutive rate cut. This decision comes in response to escalating trade tensions with the United States, particularly following the imposition of tariffs on Canadian steel and aluminum by President Donald Trump. Governor Tiff Macklem expressed concerns that these trade disputes could slow economic growth, elevate inflation, and increase unemployment.
The Canadian economy, which showed solid growth in late 2024, now faces uncertainty due to these global trade issues. Despite previous employment growth and strong economic performance, consumer confidence has declined, and business spending has slowed. Inflation remains near the 2% target but is projected to rise slightly.
Impact on the Housing Market
Canada’s housing market has been significantly affected by these economic challenges. The International Monetary Fund concluded that “Canada runs the highest risk of mortgage defaults among advanced economies” in their June 2023 report comparing 38 countries. By October 2023, housing sales had slowed by 17% compared to pre-pandemic levels, while prices stabilized. Regional disparities were notable, with more affordable markets like Calgary and Moncton experiencing price increases, while larger markets such as Toronto and Vancouver remained flat.
In 2024, the average selling price of a home in Canada decreased by 3.9% year-over-year to $724,800 in July. Sales of new condo units in the first half of the year fell 57% from the previous year, marking the slowest pace in 27 years in Toronto. Vancouver’s housing inventory increased by 39% compared to the previous year, rising above the 10-year average.
Government Response and Initiatives
In response to the housing crisis, the federal, provincial, and municipal governments announced in January 2025 a joint investment of $975 million to build 14,000 new homes near the Toronto waterfront. Additionally, the Squamish Nation in Vancouver is developing a large housing project near the Burrard Street Bridge, initially proposed at 3,000 units and later expanded to 6,000 purpose-built rental apartments. Some buildings will reach 56 storeys, exempt from local height restrictions.
Outlook for 2025
Looking ahead, Canada’s housing market is poised for a gradual recovery in 2025, driven by lower mortgage rates but slowed by affordability challenges. Economists and real estate agents anticipate strong market activity amid much lower borrowing costs and more favorable rules for buyers, despite an overall challenging affordability picture.
However, concerns about household debt and interest rates persist. Household debt continues to grow, and rising interest rates have significantly impacted the housing market, especially for those with variable-rate mortgages. If homeowners struggle to make payments, it could lead to increased listings and potential downward pressure on home prices.
In conclusion, while the Bank of Canada’s rate cut aims to mitigate the economic impact of trade tensions, challenges remain in the housing market. Government initiatives and anticipated market recoveries offer some optimism, but affordability and debt concerns continue to pose significant risks.
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