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That said, the housing market right now is actually very stable, with the average home price rising, but there is a housing crisis since there isn’t enough affordable rental housing available due to high prices. There isn’t even enough affordable housing for sale, which is another crisis of its own. Let’s take a look at some history of the Canadian housing market as well as predictions of a housing crash.
Will the Housing Market Crash, and if so, when?
In 2023, the price of homes in Canada skyrocketed, making it very difficult for first-time home buyers to purchase a home with higher prices. That said, the Bank of Canada increased interest rates to slow the increase in inflation and cool down the housing market. Since then, interest rates have started to increase, and the market is evening out with increasing housing supply.
That said, the cost of housing is still unaffordable for many due to a large spike that happened in the last year. Prices haven’t fallen much, but they are still making it difficult for first-time home buyers. Currently, the prices for homes in Canada are expected to increase by the end of 2024 and even more in 2025. A market crash isn’t predicted at this time.
What Happens When the Canadian Housing Market Crashes
The people affected the most by a housing market crash are homeowners. Often, in the case of a housing market crash, homeowners are left with large mortgages that are more than the house is worth. This makes it difficult for homeowners to make their money back on their purchase. It can even make it difficult for homeowners to renew their mortgages.
That said, in all previous housing crashes, the market always recovered. It may be difficult for homeowners at the time, but no matter where the market stands, people are purchasing homes. Eventually, the market will recover, and the house will recoup some or all of its value.
Canada and a Current Housing Crisis
Even with the government's attempt to slow down the housing market and the high house prices, Canada is still in a housing crisis. While those who currently own homes are able to recoup their real estate investment, the increase in interest rate increased mortgage payments, which made things difficult for a lot of homeowners. For those who are unable to purchase homes, the increase in interest rates increased the price of rent across the country. This made it difficult for those renting to make ends meet.
As interest rates slowly decrease, we aren’t seeing the cost of rent decrease. Many homeowners are also choosing to sell their rental property in order to make a profit instead of renting it out.
In order to combat the housing crisis a little bit, the federal government is providing incentives for those looking to build rental housing. They’ve even increased the cost of capital gains on amounts over $250,000 in order to help slow down the sale of these rental properties. That said, it could take years for this housing crisis to recover.
The Last Housing Crash in Canada
The last time that Canada had a housing market crash was in the early 1990s. During this time, Canada was in a recession due to low commodity prices, a large national debt, a weakening of the Canadian dollar and a recession in the US, which was Canada’s main trading partner at the time.
While this was the last major crash in real estate prices in Canada, there were also separate real estate bubble bursts where markets crashed, each in a different bubble territory. In Toronto, Canada’s largest city, the housing bubble burst in 1989 and in Vancouver, the housing bubble burst twice, according to Statistics Canada. It happened once in 1981 and again in 1994. These crashes didn't even occur during the same period. The biggest reason the fear of another housing market is happening is that the home-owning costs in 2008 were already above those of the market crash in 1990, and they’ve just gotten higher since then.
Housing Prices and Their Prediction for 2025
While housing prices are expected to rise Canada-wide in 2025, the decrease in interest rates is predicted to stabilize Canada’s housing market. There’s also an increase in sellers in the market since the lower interest rates make it a better time to purchase a new home. There’s also a change in the rules for first-time homebuyers, making it simpler to purchase a home at a higher price with a lower down payment.
There are also expected to be a lot of homeowners who purchased their first home before the increase in housing prices, looking to upgrade and purchase a larger home. Since they’ve earned equity on their first home, these prices are now more affordable to them.
Potential Housing Market Crashes in Canada
While a predicted housing market crash in Canada is unlikely, each province has its own housing market. These markets can fluctuate independently of the Canadian market as a whole. Let’s take a look at some of these markets and if there’s a predicted housing market crash in the following provinces.
Ontario
While the housing market isn’t anticipated to crash in 2024 or 2025, Toronto-based Oxford Economics Canada does expect that housing prices will take a hit in the later part of 2024 into 2025. It’s anticipated that prices will drop slightly by around 5%. However, even with this prediction, economists and the Canadian Real Estate Association won’t be surprised to see another increase in Ontario housing prices in early 2025 and more economic growth.
British Columbia
In BC, the current economics of the province predicts that the sale of homes will increase steadily throughout the year. However, with the current unpredictable cost of living, this increase in sales isn’t expected to increase the cost of housing. While it won’t drop much, it is expected that housing prices will stay consistent through 2025, instead of seeing significant price increases.
Alberta
Another housing market to consider is Alberta. Due to the fact that Alberta is one of the most affordable provinces in Canada, the cost of housing there is supposed to steadily increase from the previous year throughout 2024 and 2025, providing economic recovery. That said, some parts of Alberta might increase more than others. The more popular parts of the province, such as large Canadian cities and major cities, seem to have more traffic and increase than that of the more rural areas and other Canadian cities.
How Home Prices and Interest Rates Affect Home Owners
If you’re a homeowner, both real estate values and the interest rates that Canadian banks offer are going to affect you more than you think. When the rise in Canadian home prices happens, so do other home ownership costs, such as home insurance and property taxes. This is because these costs are based on property values and property prices. However, the value of your home only affects your mortgage; in the event that the value of your home becomes less than your mortgage amount, it could affect your mortgage renewal.
An increase in mortgage rates from rising interest rates will only affect those who have a variable interest rate immediately. However, it will affect those with fixed interest rates when it’s time to renew your mortgage. This can exponentially increase mortgage payments, sometimes even doubling them. Often, in cases where interest rates rise rapidly, homeowners will try to sell before they have to renew their mortgage. When interest rates start to lower, an increase in home sales will occur.
How to Purchase A Home in Today’s Housing Market
Purchasing a home in today's Canadian housing market can be more difficult, but it isn’t impossible. If you’re looking to purchase in the Vancouver real estate market, then buying your first home can be difficult, but when you look outside of the city, prices get lower. For this reason, many new home buyers are moving to small towns to start their Canadian real estate journey and venturing to the city once they’re able to build up some equity.
One of the other ways you can afford a home as first-time buyers, or as a young person, is by using the home buyers program through your RRSP to add to your down payment. When you use this program, you have 15 years to pay back the funds without being finalized. You can also use the funds from your first home savings account if you have one.
If you’re unable to afford the full 20% down payment on the home, then another option is to use the Canada Mortgage and Housing Association insurance, also referred to as CMHC insurance. This insurance allows you to purchase a home with only a 5% down payment, making it easier for first-time home buyers and creating balance in the housing system. However, there are some rules you have to follow with this program, and you have to remember the monthly payments on housing starts to increase when you reduce the down payment.
Mortgage Rules in Canada
In order to get a mortgage in Canada, no matter what the housing prices are, you do have to meet the requirements. First, you have to pass a mortgage stress test to determine whether you’re high risk or not. In order to do that, you have to be able to reasonably afford your mortgage payments as well as the down payment, which can be a high cost. They do this by weighing your income and household debt. That said, there are some new mortgage rules in Canada for first-time home buyers.
One of the biggest changes in mortgage rules in Canada is that first-time home buyers who get insured mortgages can now get 30 years of amortization instead of the previous stipulation of 25 years. Another change is that you can now get an insured mortgage on mortgages up to $1.5 million instead of the $1 million that it used to be.
With the current insured mortgages in Canada, here are the down payment breakdowns.
- 5% on the first $500,000
- 10% on the remaining portion
With an insured mortgage, you can purchase a $1.5 million dollar home with a down payment of $125,000. Without an insured mortgage, your down payment would be $300,000. However, you do have to remember that the lower your down payment is, the larger your mortgage payments will be.
Types of Affordable Housing in Canada
Since housing prices are very expensive right now, many Canadians are turning to alternatives to single-family dwellings. For financially stretched households and those in financial crisis, it can be a way to obtain housing affordability, stop paying rent and reduce financial stress while earning equity. Some of these alternative housing types include:
- Townhomes
- Modular and mobile homes
- Condos
- Apartments
Some families are even choosing tiny homes to create a little breathing room, which puts some relief on the housing demand. However, the key concern is obtaining a mortgage. Some of these housing types or more difficult to get mortgages for, or mortgage rates are much higher because the risk is much higher for the banks. This means, you’re likely to have more luck with private lenders.
Final Thoughts
While the increase in housing prices due to foreign buyers and low interest rates, has created fear that the housing market could crash, currently, it isn’t predicted to do so. Generally, in Canada, housing prices are still increasing, and it isn’t predicted to slow down anytime soon, especially with the drop in interest rates. Since many Canadians were waiting for the decrease in housing prices to occur before selling, there are actually plenty of options on the market.
If you’re in the market now to purchase a home in the Canadian real estate market, and you’re a first-time home buyer, the new mortgage rules could make a big difference for you. You could get 30 years of amortization and put a smaller down payment on home purchases of up to $1.5 million. However, if you do this, make sure you can still reasonably afford the mortgage payments.
