The Great Canadian Real Estate Stagnation Has Just Begun: BMO

Canadian real estate sales are picking up but prices haven’t budged, and they aren’t expected to in the near future. BMO Capital Markets believes the Great Canadian real estate stagnation may have just kicked off. Despite a sharp cut to interest rates and normalization of buyer volumes, prices are still moving sideways. Those expecting a rocket-like recovery are in for disappointment. The bank warns that prices remain too high, and the lack of affordability will throttle demand—even with falling interest rates.

The Great Canadian Real Estate Stagnation Kicks Off

The hype around falling interest rates have so far failed to materialize into real movement. Headlines have been focused on the annual uptick in sales, but they remain historically weak. At the same time, prices have barely budged despite interest rates making a sharp drop. In fact, home prices moved slightly lower over the past year.

Forecasts expecting a rapid recovery of the market “next year” are starting to surface for a third year in a row. However, it’s hard to tell if that’s optimism or delusion right now. ”There are clearly signs across the country that the worst of the correction is behind us, but the case for a trampoline-like rebound is also a tough one,” explains Robert Kavcic, senior economist at BMO. 

Canadian Interest Rates Are Falling. Mortgage Rates? Not So Much

Why haven’t rate cuts driven a larger boost to home sales and prices? It’s natural to assume it would have, especially when combined with policymakers spending hundreds of billions on stimulus to boost housing activity.

“Ultimately it comes down to affordability and, at current price levels, mortgage rates haven’t sunk quite far enough to tip the calculus. With 5-year fixed rates now in the low-4% range, even three more BoC rate cuts this year would only bring variable rates down to similar levels,” says Kavcic. 

The Bank of Canada (BoC) policy rate is being closely watched by the real estate industry. However, short-term rates only impact short-term borrowing costs. In this case, only variable rate mortgages are impacted by rate cuts, but fixed-term mortgages are influenced by bond yields. As the bank points out, fixed rate mortgages are already much cheaper. That means the rate cuts aren’t providing more credit capacity, they’re only boosting sentiment.

The bank uses Toronto as a key example of how the market isn’t playing out as expected. Prices in the region are down 1.8% from last year despite an uptick in home sales. At the same time, new listings are up 20.2% from last year, “… leaving the market balance still softer than at the start of the year, despite BoC easing,” notes the bank. 

For those thinking, “well that’s Toronto!” Fair point. Canadian real estate is experiencing regional variations, with some markets doing better than others. However, as the financial capital and most expensive market in the country, prices in the region serve as a de facto upper bound for the market. Halifax may be a lovely city, but it will have a hard time seeing valuations trade at par without significant development of its industry.

“If what you see is what you’ll get for mortgage rates this year, it might lead to a stable/flat/rangebound/[insert your favorite adjective here] market in 2025…,” adds Kavcic.

9 Comments

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  • Reply
    David E. 5 days ago

    One word: greed. People who purchased a home in the last 4-5 years at EXTREMELY inflated prices don’t want to accept the new reality. Those who already owned a home saw the value spike and now think they are richer than they really are. What is going to happen in the coming years is very simple. Nothing is going to be built/sold, and a whole industry of roofers, electricians, framers, plumbers, brick layers will be out of work, which in turn will crash the economy. Brace for a deep recession… our GDP is way too dependent on real estate. Reset coming. Get the popcorn.

    (It’s been proven over and over again that every bubble pops eventually. This one will be no exception.)

    • Reply
      Had it with Canada 14 hours ago

      David E, sure wish you were right, been waiting 10 years for market here to make any sense at all, but since crashing Canadian RE prices would be an existential threat to both the govt and all banks, absolutely any measure, no matter how absurd, will be taken to ensure prices never fall significantly (like back to fundamentals as they need to do). Eventually we’ll see govt borrowing money to buy houses directly from under water homeowers to keep the market propped up.
      Can’t wait to leave this stupid corrupt country :(.

  • Reply
    Frani 5 days ago

    And yet the feds continue to intervene to prevent a crash given housing is 8% of Canada’s GDP. Looks as though 50+year amortizations will be a thing soon. Surely indebtedness has nothing to do with out of control fed spending and taxation at record levels. Canada NEEDS adults in the room soon or the 2 million a month at foodbanks will also double.

  • Reply
    Scott Henderson 4 days ago

    The bank of Canada must step in and drop rates faster to zero.
    Housing is of CRITICAL importance to Canada and prices must be supported at all costs.

    Protect our wealth.

    • Reply
      Fed up 14 hours ago

      Go away, realtor! High housing prices have destroyed the Canadian economy and made everything unaffordable.
      The grocery store has to pay excessive rent, because their landlord got ripped off on the land cost. Every employee demands big raises to pay for their groceries and other larger bills, so their employer has to raise its prices.
      Couples don’t want to have kids, because costs are so high.
      A very painful correction to fundamentals is desperately needed in Canada.
      Demand our politicians to #LetHomePricesFall !!

  • Reply
    Patata 4 days ago

    With all the instability happening with US tariffs, immigration, change of government, and that prices are inflated by at least 30% . Price stagnation will be around for the next 10 years.

  • Reply
    Rick Mackey 4 days ago

    My renewal came up on January 1st of this year and I hummed and hawed over whether to go with variable this time, seeing as the rate hadn’t dropped as far as I wanted (my seven year fixed rate was 3.49%). I finally “pulled the trigger ” on 3.89% fixed and now I feel like I “dodged a bullet”.
    I do hope the market recovers, but at least I’m safe for now.

  • Reply
    JAYDEE 4 days ago

    F Toronto.

  • Reply
    Rob 4 days ago

    Not sure if it’s the cost or the fear the Liberal government will impose a capital gains tax after the sale.

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