The Canadian real estate market is currently in a period of stagnation, with sales showing signs of recovery but prices remaining stubbornly unchanged. According to BMO Capital Markets, this stagnation marks the beginning of a prolonged period of price stability. Despite recent interest rate cuts and increased buyer activity, housing prices continue to hold steady, challenging expectations of a rapid rebound. Here’s a detailed look at why this trend persists and what it could mean for the market.

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Sales Rebound, But Prices Remain Flat

While headlines highlight an uptick in real estate sales, the broader context tells a more subdued story. Annual sales have improved, but they remain historically weak, and prices have dipped slightly over the past year. Many experts and forecasts have prematurely predicted a swift recovery, but these optimistic projections have yet to materialize.

According to Robert Kavcic, Senior Economist at BMO, “the worst of the correction is behind us,” but a “trampoline-like rebound” is unlikely. In other words, the market may have stabilized, but significant upward movement in prices remains improbable.

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Affordability Challenges Curb Market Growth

Falling interest rates are traditionally a catalyst for increased housing activity, but this time around, they’ve done little to boost prices or sales significantly. The main reason? Affordability remains a critical issue. Despite lower rates, mortgage costs are still high relative to income levels, deterring potential buyers.

Fixed mortgage rates are now in the low-4% range, and even with further rate cuts from the Bank of Canada (BoC), variable rates would only align with these levels. This means that rate reductions are not significantly increasing borrowing capacity but are instead influencing market sentiment. Without a substantial drop in housing prices or a more significant reduction in rates, affordability will continue to throttle demand.

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Variable vs. Fixed Rates

The BoC’s policy rate directly affects short-term borrowing costs, such as variable-rate mortgages. However, fixed-rate mortgages, which are tied to bond yields, have already seen substantial declines. As a result, further cuts to the BoC rate have a limited impact on expanding credit capacity.

This dynamic is evident in Toronto, one of Canada’s most expensive housing markets. Despite a modest 1.8% year-over-year price decline and a 20.2% increase in new listings, prices remain relatively stable. Toronto’s performance serves as a benchmark for the national market, underscoring the broader challenges of achieving price growth in the current environment.

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Regional Variations and Broader Market Implications

It’s important to note that Canadian real estate markets are not monolithic. Regional variations exist, with some areas outperforming others. For instance, smaller markets may show resilience, but they often lack the economic drivers to sustain high valuations seen in larger metropolitan areas like Toronto and Vancouver.

As the financial hub of Canada, Toronto often sets the tone for national real estate trends. If prices in Toronto remain flat or decline slightly, other regions are unlikely to see significant appreciation without substantial changes in local economic conditions.

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Looking Ahead to 2025

With the current trajectory of interest rates and affordability constraints, the market is expected to remain stable or flat through 2025. BMO’s analysis suggests that while the worst of the correction is over, the conditions for a strong recovery are not yet in place. “If what you see is what you’ll get for mortgage rates this year, it might lead to a stable/flat/rangebound market in 2025,” adds Kavcic.

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Conclusion

The Canadian real estate market’s stagnation is a product of high prices, limited affordability, and modest improvements in borrowing costs. While sales are rebounding, prices remain resistant to upward movement. As we move into 2025, the market is likely to continue its trend of stability, with little room for dramatic shifts unless affordability improves significantly or economic conditions change.

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For prospective buyers, sellers, and investors, understanding these dynamics is crucial for making informed decisions in a challenging market. At Coldwell Banker Horizon Realty, we’re here to provide expert guidance tailored to your unique real estate needs. Contact us today to navigate the complexities of the current market with confidence.