What Happens When the Canadian Housing Market Crashes
The people most affected by a housing market crash are homeowners. Often, during a housing market crash, homeowners are left with large mortgages that exceed their homes’ values. This makes it difficult for homeowners to recoup their investment. 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.
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 bursts of real estate bubbles, with markets crashing in different bubble territories. In Toronto, Canada’s largest city, the housing bubble burst in 1989, and in Vancouver, it 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 for the fear of another housing market crash 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.
What is the Mortgage Trigger Rate?
When it comes to getting a mortgage in Canada, an important term to understand is the mortgage trigger rate. If your mortgage is a variable-rate loan with fixed payments, this is the rate at which your regular fixed payment covers only the accrued interest. This means that none of your fixed payments will go towards the principal of your mortgage.
Are Mortgage Arrears Actually Rising?
Due to renewal or payment shock, arrears statistics have increased in Canada. In 2022, arrears rates were only at 0.14%, whereas they’re now sitting around 0.26% in 2026. If we look at the growth rate, we are seeing about 27% more arrears per year. This is even with amortization extensions and mortgage deferral programs to help relieve some of the pressure.
As a result, the mortgage delinquency rate has also increased. We are seeing more power-of-sale listings and foreclosure filings than in recent years. For a while, many variable-rate mortgages were also hitting their trigger points due to large increases in interest rates.
Does Negative Equity Impact Your Renewal?
When you have residential mortgage debt and are looking to renew your mortgage, negative equity can play a large part. While it may not have an impact if you choose to stay with your current lender, it can impact switching to a different lender. This can lead to getting denied. You may have a better chance with a private lender, but a lump sum could be required.
Mortgage Renewals in 2026
Many lenders report that 2026 will be one of the largest years on record for mortgage renewals. It’s believed that over a million households will transition from low rates to higher rates. Many with fixed rates will face payment increases of 15%-25%. Those with variable rates have already absorbed the majority of these hikes and will face less impact.
When your mortgage is due for renewal, your bank will offer you a new rate to keep you as a customer. However, you aren’t required to accept that rate, and you can shop around. Plus, according to OSFI B-20 guidelines, a new mortgage stress test isn’t required if you’re keeping your loan amount and amortization period when switching to a new lender.
Which Cities Face the Highest Renewal Risk?
Some of the largest factors that impact your mortgage renewal risk include high household debt, the labour market, unemployment rates, and resale market liquidity. Currently, the Greater Toronto Area and Vancouver are the two cities facing the greatest risk.
What Happens if You Default Upon Renewal?
With the current economic uncertainty, mortgage holders can struggle to secure a mortgage renewal. If you can’t, a few things could happen. The first is when your lender rolls your mortgage over into a 6-month open-term loan at a higher interest rate.
If the lender doesn’t go with the first option, they may instead demand repayment. If you’re unable to pay, the lender can initiate foreclosure or a judicial sale. This allows them to recover the debt; however, you will lose your home.
When you’re in the market for a new mortgage, the best way to start is by working with mortgage brokers. They can help you find a mortgage that fits your budget and get the best rate.
Condo Oversupply Impacting a Market Crash in Toronto
Right now, the condo market in Toronto is experiencing a downturn. This has a lot to do with prices dropping about 25% from their peak due to oversupply and weak demand. As a result, we are seeing a continued drop in pricing.
While we don’t know the exact impact this will have, similar situations have historically resulted in market crashes. However, only time will tell.
How Do Bond Yields Set Fixed Rates?
Fixed mortgage rates in Canada are set by adding a 1-2 percent profit margin to five-year government bond yields. Fixed-rate pricing is determined this way because banks use bond yields to determine the cost of securing the capital needed for fixed-rate loans.
This is different from other interest rates in Canada, which are determined by the Bank of Canada’s policy rate, which is influenced by quantitative tightening aimed at meeting the inflation target.
Does the Foreign Buyers Plan Still Apply?
Currently, the foreign buyer plan is still in effect in Canada until January 1, 2027. It applies to homes with 3 or fewer units, and there is a $10,000 fine for violations. Foreign buyers are still able to purchase buildings with 4 or more units and vacant residential land. Those with qualified work permits may purchase one home.
How Negative Equity and Underwater Mortgages Work
In Canada, an underwater mortgage occurs when your loan exceeds the market value of your home, and not your loan-to-value limits. This means that the loan on your home is higher than your home’s real value. Negative equity has the same definition.
If you do have negative equity, it’s usually a good idea to stay put because it’s usually only temporary. However, this isn’t always possible. If you do have to sell and the proceeds don’t fully cover the mortgage, you’re still responsible for paying back the loan under uninsured-borrower rules.
Immigration Cuts and Slowing Population Growth
While we aren’t currently seeing a housing market crash in 2026, the slowdown in population growth and reductions in immigration targets are driving a soft price adjustment. However, rental demand is slowly easing, and a structural housing shortage continues to provide a price floor.
Calgary Vs. Toronto
While Calgary and Toronto are both popular cities in Canada, there is a large regional market divergence. Without looking at the employment rate and just looking at the Housing Starts data, we can see quite a difference.
Right now, Calgary is seen as a seller’s/balanced market, and Toronto is more of a buyers’ market. The housing starts trend for Calgary is surging at a record pace, while it’s very low in Ontario. There’s also a major difference in benchmark home prices.
In Calgary, benchmark prices sit between $600,000 and $640,000 on the benchmark price index, with only a 5% GST. In Toronto, benchmark prices are around $900,000, and the HST tax rate is 13%. In terms of Land Transfer Taxes, you have to double in Toronto.
When looking to purchase in either of these places, you have to consider both Calgary’s market strengths and Toronto’s condo oversupply. You also need to consider the:
- Sale to new listing ratios
- Rental vacancy rates
- Investor-owned condos
- Zoning reform
- Development changes
- Construction costs
The Latest Outlook From the CMHC
With all the things happening in 2026, including fourplex legalization in BC, international student caps, condo presale cancellations, and negative cash-flow rentals, the CMHC’s housing outlook in the Residential Mortgage Industry Report doesn’t predict a housing market crash. The current prediction is that a slow recovery will begin in 2027, with more balanced housing markets.
So far in 2026, national home sales have declined by 2.8%, and there are still months of inventory on the market. Prices are, on average, dropping by 0.6% nationally. The high cost of borrowing also limits the ability to buy, as evidenced by bank stress-test disclosures and household debt-to-income ratios. Most people’s debt service ratios are too high.
A Soft Landing Vs Correction Scenarios
Instead of a market crash, the trend is for the housing market to slowly correct itself. In soft-landing scenarios, you’re going to see declines until the market corrects itself. Even with seasonally adjusted data and adjusted stress-test scenarios, speculative demand is predicted to remain the same.
For example, when we look at the Teranet Index and see Vancouver’s detached prices, we see a gradual decline over time. In a correction scenario, prices will drop quickly and remain low before gradually increasing again.
How Home Prices and Interest Rates Affect Homeowners
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 Canadian home prices rise, so do other homeownership 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 affects more than just your mortgage; if it falls below your mortgage amount, it could affect your mortgage renewal.
An increase in mortgage rates due to rising interest rates will affect only those with variable interest rates immediately. However, it will affect those with fixed-rate mortgages when it’s time to renew.
This can exponentially increase mortgage payments, sometimes even doubling them. Often, when interest rates rise rapidly, homeowners try to sell before they have to renew their mortgage. When interest rates fall, home sales will increase. The risk, though, is that there are no equity cushions.
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 homebuyers are moving to small towns to start their Canadian real estate journey and venturing into the city once they’ve built up some equity.
Another way you can afford a home as a first-time buyer or young person is by using the Home Buyers Plan through your RRSP to add to your down payment. When you use this program, you have 15 years to repay the funds without penalty. 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, as was historically required, another option is to use Canada Mortgage and Housing Corporation (CMHC) insurance. This insurance allows you to purchase a home with only a 5% down payment, making it easier for first-time homebuyers and helping balance the housing system. However, there are some rules you have to follow with this program, and you have to remember that monthly housing payments increase when you reduce the down payment.
Mortgage Rules in Canada
To get a mortgage in Canada, regardless of housing prices, 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. 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 new mortgage rules in Canada for first-time homebuyers.
One of the biggest changes in mortgage rules in Canada is that first-time homebuyers with insured mortgages can now choose a 30-year amortization instead of the previous 25-year requirement. Another change is that you can now get an insured mortgage on mortgages up to $1.5 million, up from $1 million.
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 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 high 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 achieve housing affordability, stop paying rent, and reduce financial stress while building 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 provides some relief to the housing demand. However, the key concern is obtaining a mortgage. Some of these housing types are harder to get mortgages for, or mortgage rates are much higher because they pose a greater risk to banks. This means you’re likely to have more luck with private lenders.
Buyers Payment Shock: 2020 to 2022
In a cooling housing market with higher interest rates than in 2020, many who purchased a home between 2020 and 2022 are experiencing payment shocks. Since many of these buyers are currently part of the renewal wave, many household budgets are feeling the pinch from the previous post-pandemic lows.
Many people are having to take advantage of mortgage payment deferrals to avoid missed payments and falling 90 days or more behind. Many are experiencing significant consumer credit stress, but we are also seeing strong borrower resilience. Even just a percentage point can be a significant payment difference, especially for those who purchased homes at peak prices in a low-rate environment.
Insolvency Filings and Consumer Proposals
If you’re unable to make your mortgage payments in Canada, it isn’t as simple as just filing for insolvency or consumer proposals to reduce your debt. These can’t be filed for secured debt. The home will have to be sold first before anything can be done. That said, you can file either of these for non-mortgage delinquencies.
Before you file, it’s important to note that your credit score will drop basis points with both Equifax and TransUnion. It can take time to rebuild your credit score and reach a level that allows you to start getting more credit lines.
Final Thoughts
While the increase in housing prices due to foreign buyers and low interest rates has created fears that the housing market could crash, it isn’t currently predicted to do so. Generally, housing prices in Canada are still rising and aren’t expected to slow anytime soon, especially with the drop in interest rates. Since many Canadians were waiting for housing prices to decrease before selling, there are 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.
