2025 Real Estate Update

Five Reasons Why Home Prices Will Rise 10% in 2025

In 2025, home prices in Canada are expected to rise by 10% year-over-year. Here are the five key factors driving this predicted growth:

1. Delayed Purchases Have Built-Up Demand: Many potential homebuyers have been waiting for mortgage rates to drop, creating pent-up demand. As more people have saved enough for a down payment, a surge in buyer activity is expected, especially as favorable conditions align in 2025.
2. Price Cap Increase on Insured Mortgages: The increase in the insured mortgage price cap to $1.5 million (up from $1 million) will make it easier for many buyers, especially first-time buyers, to enter the market. With lower down payments and better rates on insured mortgages, this will drive demand, particularly in cities like Toronto and Vancouver.
3. Lower Mortgage Rates: Although mortgage rates have been high in recent years, they are expected to continue dropping in 2025, particularly for variable-rate mortgages. With rates stabilizing, buyers who have been hesitant will likely begin to act, contributing to price growth.
4. Housing Prices Have Stabilized: After a period of price declines, the housing market has found its bottom. Prices are no longer falling, and as demand picks up, prices are expected to rise, creating a favorable environment for sellers and buyers alike.
5. High Immigration Rates: Canada’s strong immigration targets, with 395,000 newcomers expected in 2025, will increase demand for housing. Immigrants, especially those with financial means, will look to buy homes, further driving up prices.

In summary, these factors—combined with stronger demand and more favorable financial conditions—are expected to push home prices up by 10% in 2025. Buyers may want to act sooner rather than later, as today’s prices could look much more affordable a year from now.

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Multifamily in 2025: Demand Will Dominate

After more than two years of apartment supply dominating the multifamily market, 2025 is expected to bring a shift toward greater market balance. This change will be driven by a combination of surging demand for rental housing and a slowdown in the completion of newly built apartment units. With the fundamentals of the multifamily market remaining strong, there are indications that investor interest in this sector will increase in the coming year. However, despite the market’s favorable conditions, recent reports suggest that investment activity in multifamily properties is still lagging behind historical averages.

One of the primary challenges facing the market is the persistently high ten-year U.S. Treasury yields, which continue to make financing more expensive. The elevated yields have been a significant barrier for investors and lenders alike, contributing to the sluggish investment activity. However, there is optimism that the lending environment could improve in 2025 as the Federal Reserve continues its policy of gradually lowering interest rates. If the Fed’s strategy results in more favorable borrowing conditions, it could ease some of the financing challenges currently limiting investment in the multifamily sector.

In summary, while 2025 is poised to see a more balanced multifamily market due to strong demand and a slowdown in new apartment construction, financing hurdles, particularly high Treasury yields, are still tempering investment activity. That said, if the Fed’s actions help reduce interest rates, the lending environment could become more conducive to multifamily investment, potentially boosting activity in the sector.

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Based on the provided information, here is the text you can use: The 2025 Mortgage Rate Forecast analyzes current economic trends and predicts future mortgage rates. With the next interest rate announcement and monetary policy report from Canada scheduled for January 29, 2025, it is crucial to stay informed about the potential impact on mortgage rates. Stay tuned for updates on this important economic indicator by emailing matt@bldfinancial.ca

2025 Economic Update

2025 Rate Update

Fixed Mortgage Rates

Fixed rates have retreated from their pandemic-era peaks, yet they are expected to decrease at a more measured pace compared to variable rates. Projections indicate that the five-year fixed rate may decline by an additional half percentage point by the close of 2025, with the most favorable forecasts suggesting a reduction to approximately 4%.

Rates Decrease = Buying Power goes up

Lower mortgage rates, though welcomed by prospective homebuyers, frequently exacerbate competitive bidding wars within Canada’s ongoing housing shortage. This phenomenon can offset any potential affordability improvements, as constrained supply continues to drive home prices upward.

Successful buyers often find themselves paying elevated prices, incurring higher property transfer taxes, and taking on increased mortgage debt.

Ultimately, the winning bidder is often the individual who, irrespective of mortgage rate fluctuations, would have secured the property anyway—the one with the most substantial financial resources. 

Fixed and Variable Forecasts:

Predicting the exact interest rates for fixed and variable mortgages at the end of 2025 is inherently uncertain due to a variety of factors, including inflation trends, economic growth, central bank policies, and geopolitical developments. However, based on current economic forecasts and market trends (as of 2024), here are some general expectations for both fixed and variable rates:

Fixed-Rate Mortgages:

• Expectation: Fixed mortgage rates are likely to decline slightly by the end of 2025, but the decrease may not be as sharp as the drop-in variable rates. This is primarily due to the fact that fixed rates tend to be more closely tied to longer-term bond yields, which may remain elevated in response to past interest rate hikes aimed at combating inflation.
• Estimated Range: By the end of 2025, the five-year fixed-rate mortgage could fall by around 0.25% to 0.50%, potentially reaching a rate of 4% to 4.25%. The most optimistic scenarios could see rates approach 4%, but significant cuts from current levels (around 5.5% to 6% in late 2024) seem unlikely unless inflation is substantially tamed, and economic growth is stable.

Variable-Rate Mortgages:

• Expectation: Variable rates, which are influenced by central bank policy, are expected to remain relatively high in the near term as the Bank of Canada and other central banks maintain a cautious stance on inflation. However, with inflation easing and economic growth slowing, variable rates are likely to decrease gradually by the end of 2025.
• Estimated Range: By 2025, variable rates could drop by 0.5% to 1%, potentially landing in the 4.5% to 5% range, depending on how the Bank of Canada adjusts its overnight rate. If inflation continues to moderate and the Bank of Canada adopts a more dovish approach, variable rates could fall further.

Key Considerations:

1. Inflation and Economic Growth: If inflation remains above target or if there is unexpected economic turbulence, rates could stay higher for longer.
2. Central Bank Policies: The Bank of Canada’s decisions will heavily influence variable rates. If inflation is well-controlled and the economy slows, there may be opportunities for rate cuts. Conversely, if inflation spikes or the economy overheats, rates could remain elevated or even rise.
3. Bond Market Trends: Fixed rates are more influenced by long-term bond yields, so the outlook for global interest rates and investor sentiment will play a role.

Immigration Update

Canada’s population reached 41 million in April 2024, with immigration driving nearly 98% of this growth in 2023. Of this, 60% was due to temporary residents. The government’s strategy to moderate population growth, following the post-pandemic surge, aims to sustain strong GDP growth, boost GDP per capita, improve housing affordability, and reduce unemployment from 2025 to 2027.

By reducing immigration levels, the government expects to alleviate some pressure on the housing market, potentially reducing the housing supply gap by around 670,000 units by 2027.

The immigration plan targets net new temporary residents, excluding short-term visitors or seasonal workers. To manage these levels and maintain the integrity of the immigration system, the government is reforming programs like the International Student Program, tightening requirements for temporary foreign workers, and adjusting work permits for international students and their spouses.

Immigrants contribute significantly to Canada’s economy, particularly in sectors such as healthcare, construction, and transportation. In residential construction, they account for 23% of general contractors and builders, playing a crucial role in the sector’s growth.

Battling Inflation

Inflation has now returned to the target range, yet there are growing concerns that the central bank may inadvertently overcorrect to the downside. Having commenced rate cuts in June 2024, the Bank of Canada is navigating a careful path toward a neutral stance. Maintaining inflation at a stable 2% is vital for reinforcing price stability over the long term.

The Bank of Canada has highlighted that a reduction in immigration levels will likely dampen both economic growth and inflationary pressures.

Nevertheless, certain federal and provincial policies—such as the temporary suspension of the GST on select consumer goods, one-time payments to individuals, and adjustments to mortgage regulations—have the potential to reignite inflationary forces.

HuronMortgages.ca Important Note:  Buying Real Estate in a High-Inflation Environment

In a high-inflation environment, real estate serves as a strategic tool for preserving wealth and capitalizing on the erosion of money’s value. By purchasing property, you not only protect yourself from the diminishing purchasing power of cash but also position yourself to benefit from rising property values, increased rental income, and the long-term advantage of paying off your mortgage with money that’s worth less in real terms. In essence, buying real estate during periods of high inflation is a way to convert your depreciating dollars into an appreciating asset that can provide financial security and growth over time.

In Short:

At the end of 2025, fixed rates could be around 4% to 4.25%, and variable rates might range between 4.5% and 5%, assuming inflation continues to moderate and economic conditions stabilize. However, these estimates are subject to change based on evolving economic conditions, central bank actions, and global market trends.