Will the Housing Market Crash in Canada?

| Buying

Canada’s real estate market has taken three hits that tend to indicate a housing market crash.
First it was high interest rates, then it was high inventory, and now it’s economic uncertainty. So
will the housing market crash in Canada? Let’s take a look at each of these factors to explain
what’s happening.

Keep your finger on the pulse of the market. Check out our latest Toronto real estate market reports on our blog.

The Housing “Bubble”

In the words of Coldplay, to better understand the market, we have to go back to the start.
Historically low interest rates triggered by the pandemic made it easier for homebuyers to
qualify for a mortgage. Increased demand reduced supply, pushing housing prices upwards as
sellers found themselves in the driver’s seat. As a result, we were in a seller’s market for years,
creating a housing bubble when the market peaked in 2022.

Learn more about buying or selling real estate in Canada with these posts next:

Canadian Inflation

A pile of things contributed to Canadian inflation:

  • Supply chain issues thanks to the pandemic and the war in Ukraine
  • High demand for housing
  • A rebound in household spending post-pandemic
  • Reduced crop yields
  • Increased energy prices

As the Bank of Canada (BOC) watched inflation rise, it decided to pump the brakes by
increasing interest rates.

High Interest Rates

Although BOC’s tactics decreased inflation, the interest rate increase caused issues for both
home buyers and homeowners.

First, higher interest rates made it harder for home buyers to qualify for a mortgage. Next,
homeowners carrying a fixed-rate mortgage up for renewal suddenly went from reasonable or
downright low interest rates they could afford to mortgage payments increased by hundreds of
dollars a month. For those with variable rates, the increase caused many to hit their “trigger
rate.” Trigger rates are a nightmare scenario where the money paid is only covering interest.

Even worse, any interest not covered by the payment is added onto the mortgage balance.
Basically, that puts the homeowner in negative amortization, which, in laypeople’s terms, means
they are actually borrowing money instead of paying off their mortgage.

Read: How Interest Rates Affect Home Prices in Canada to get a closer look at the relationship between interest rates and the housing market.

High Inventory

You’re probably seeing where this is going. As mortgages became too expensive, many
homeowners were forced to sell. With more homeowners forced to sell, we saw higher inventory
than we typically would. Adding to the inventory conundrum, high interest rates kept many
buyers on the sidelines waiting for rates to become more affordable. This double whammy kept
inventory high with few buyers out there to help bring listings down.

But it actually was a triple whammy. Let’s not forget investors and developers. Higher interest
rates increased landlord carrying costs, making mortgage payments higher than the rental income they generated. Many of those investors were forced to sell. Developers found themselves sitting on unsold inventory with increased competition from resale units. Their strategy was to switch to rentals, boosting inventory and bringing rent down. As leases came up for renewal, tenants had more options, giving them negotiating power, forcing rent down even further. Even more landlords had to sell, and the condo market hit historic lows.

Still have questions about Toronto real estate? Here are a few more posts you might find interesting:

The Pendulum Swings

The few buyers out there who could afford the higher interest rates used their negotiating power
to get a better price, pushing housing prices down. For a while buyers were high-fiving their real
estate agents as high interest rates helped balance out the real estate market. The higher
interest rates impacted supply and demand. At first it helped balance the market. But then the
pendulum swung the other way, creating a buyer’s market as reduced demand and higher
inventory continued.

Economic Uncertainty

Enter President Trump. With ongoing threats to the Canadian economy thanks to on-again, off-
again tariffs, buyers are back to the sidelines despite reasonable interest rates and attractive
prices. That brings us to the big question: When will the housing market in Canada crash?

According to TRREB, increased certainty on the economic front, AKA settled trade with the U.S.
and China, should see home sales increase. The combination of low borrowing costs and high
inventory will be too hard to resist for buyers secure in their jobs and finances. Those buyers are
the heroes that can help Canada avoid a housing market crash. Adding to the hopefulness of
the market, the RBC projects a 7.9% rebound in home resales next year but below the pre-
pandemic five-year average.

What’s the difference between Canadian and American real estate? Check out: Canada Vs. The US, What to Know Before Moving Here

The Bottom Line

Despite all we’ve been through in 2025, low interest rates and increasing consumer confidence
should keep a real housing market crash at bay. With affordable housing prices and borrowing
costs, buyers feeling secure in their finances can step up to the plate and start buying up the
inventory. As the inventory starts to balance out, homebuyers will help stimulate the economy.

So we say, buck up, Canada! Together we can weather the storm and see a turnaround in
2026.

Do you have more questions? Concerns? Just want to chat real estate? Get in touch today by calling us at 416.291.7372 or emailing us at hello@christinecowern.com.