Outlook Worsens for Canada's Property Market

After years of dizzying price appreciation, Canada’s property market stands precarious as it launches into 2025.

Falling mortgage rates offer some respite to overleveraged homeowners, but deeper economic forces suggest that a further correction is increasingly probable.

The confluence of higher-for-longer interest rates, geopolitical trade tensions, shifting immigration policies, and a construction overhang has created a fragile equilibrium that could tip the housing market downward.

The Illusion of Affordability

Variable mortgage rates have declined significantly, dropping from 7.2% at the end of 2023 to 4.7% today, while five-year fixed rates have eased from 6.1% to 4.7%. Lower rates, however, do not necessarily equate to increased affordability. Mortgage qualification in Canada is primarily based on the five-year fixed rate, which has not fallen as sharply as variable rates. As a result, home-buying budgets remain constrained, tempering the optimism of those hoping for a renewed housing boom.

Moreover, rates remain well above the ultra-low levels seen between the financial crisis of 2008 and the pandemic, when five-year fixed rates hovered between 2% and 3%.

Trade War Tremors

The biggest threat to Canada’s economy in 2025 may not come from within but from its largest trading partner. Donald Trump, now in his second term, has imposed a 25% tariff on Canada and Mexico, its greatest trading partners.

Canada has retaliated, in kind, with a 25% tariff on U.S. goods and services igniting a full-blown trade war. Canada and the United States have declared a trade war, and in war there are no winners.

A 2019 Bank of Canada study modelled a scenario in which the U.S. imposes a blanket 25% tariff on imports, prompting global retaliation. The outcome? Short-term inflationary spikes followed by deep recessions in Canada and Mexico. With over 75% of Canadian exports destined for the U.S., the knock-on effects on employment and consumer confidence would be severe. Housing market would not be immune. The 2019, research was recently updates by the Bank of Canada confirming our fears.

Immigration Policy Whiplash

For years, Canada’s property market was buoyed by rapid population growth, largely driven by immigration. That trend is reversing.

The federal government, under pressure to address housing affordability, has signalled a pivot towards more restrained immigration policies. Byt he government’s calculations, Canada’s population will shrink in 2025. A slowdown in population growth, or a shrinking population, means fewer new renters and buyers entering the market, putting downward pressure on both home prices and rents. It also reduces Canada’s potential GDP growth, further dimming the long-term outlook for housing demand.

A Housing Supply Glut in the Making

Even as demand faces headwinds, supply is surging. Canadian cities are awash in new construction, the remnants of a building boom initiated when interest rates were near historic lows. Toronto alone has 100,000 housing units under construction, 16% more than three years ago. Vancouver has 64,000 units in progress (a 42% increase), while Calgary is seeing a record 23,000 homes being built, a staggering 60% jump.

If demand falters due to tariffs, economic uncertainty, or weakening population growth, this glut of supply could lead to a sharp correction in home prices.

A Market on Edge

Canada’s housing market has long defied expectations, fuelled by a mix of cheap credit, strong immigration, and robust demand. Of course, there are regional differences and in 2024, Alberta was the belle of Canadian property markets. But in 2025, tailwinds are shifting into headwinds.

Falling mortgage rates may not be enough to counteract the weight of a trade war, a policy-driven slowdown in immigration, and an oversupply of housing. While the future is never certain, the risk of a correction in Canada’s property market has rarely been higher.

Alberta, which looked unstoppable in 2024, is acutely vulnerable to tariffs on oil exports. It can’t easily divert capacity to customers in other countries because all of the pipelines run south into the United States.