Canadian real estate is already in its largest correction on record by some measures, but it may get worse. A new Oxford Economics report forecasts further declines in home prices and sales as rising interest rates hit an already weak market. High energy prices, economic uncertainty, and stretched valuations are expected to add further downward pressure. 

Canadian Home Prices And Sales Expected To Fall Further

Despite the severe correction in home prices, the firm sees them moving lower for at least a few months. “We expect home sales volumes and prices to slide this fall and into early next year as mortgage rates rise,” explains Tony Stillo, director of Canada economics at Oxford Economics. 

He notes that home prices remain elevated relative to incomes, presenting further risk for homebuilders. Rising expectations of rate hikes add to that risk. 

Bank of Canada Rate Hikes Expected Soon

The firm expects two rate hikes from the Bank of Canada (BoC) by the end of this year, the first within days. Next week they see a 25 basis point (bp) hike at the central bank’s October 28th meeting, and another in early December. Next week’s hike may be delayed by the recent weak employment data, according to Stillo. But he still sees a 50 bp increase by January, bringing the overnight rate to 2.75%, their estimate of neutral, where monetary policy neither stimulates nor throttles economic activity. 

As economists are increasingly noting, the driver of rate hikes here isn’t an overheated economy. Weak economic and employment data reinforces that this isn’t an economy firing on all cylinders, but one that would struggle with rate hikes. However, Stillo explains the catalyst fueling rate hike expectations is energy prices. 

Brent crude is forecast to remain above US$100 per barrel for six months, he notes. By their calculations, this is expected to push headline inflation into the mid-3% range in late 2026 and early 2027. Bond yields have already begun to reflect expectations of upward pressure. 

“A rapid rise in bond yields will continue to push borrowing costs higher throughout the economy, weighing on interest-sensitive sectors like housing and spending on consumer durables,” warns Stillo. 

Weak Hiring and a Shrinking Population Add To Housing Pressure

Higher interest rates won’t be the only factor working against housing activity in the near-term. “A weak job market weighed down by the ongoing trade war with the US, squeezed household incomes from high fuel prices, and a shrinking population will hurt housing demand,” explains Stillo.  

He cites the 68,000 jobs lost in September—roughly 110,000 lost over the past two job reports—as evidence that hiring will remain weak over the short-term. A perfect storm of higher fuel costs squeezing disposable income, tariffs, and trade uncertainty is weighing on businesses.  

Canada’s population declines are a less certain factor. Stillo expects the population to decline if policymakers maintain their goal of shrinking the share of non-permanent residents (NPRs) to 5% of the population by the end of 2027. The recent upward revisions suggest a much sharper decline would be needed to meet that goal. Oxford is awaiting Ottawa’s immigration update before revising its demographic forecast. 

As for weaker households, they face a sticky situation. Higher rates will squeeze spending power, but so would higher energy prices and elevated inflation. “Elevated debt will continue to constrain spending by Canadian households and make them vulnerable to job losses, higher interest rates, and a resurgence in oil prices,” warns Stillo. 

Oxford doesn’t see the downturn lasting forever—it only feels that way. The firm expects a housing recovery to start in the second half of 2027 through 2028, just a little over a half-decade since the correction began. Before then, rising borrowing costs and weak demand point to a near-term slump. However, with prices still stretched relative to incomes, Oxford warns the correction could prove deeper or longer than its baseline forecast.