RBC warns of ‘bumpy’ road as housing recovery stalls again

A subdued December capped what RBC Economics called a “lackluster” 2025 for Canada’s housing markets, as early signs of recovery in major centres faded under the weight of affordability strains, a trade war and softer labour conditions.

“Adverse weather may have been a factor in some cases, but persistent affordability challenges, economic uncertainty and job market softness have, no doubt, kept many prospective homebuyers at a standstill,” said Robert Hogue, assistant chief economist at RBC.

Across Vancouver, Calgary, Toronto, Montreal and other large markets, “promising recoveries” that have followed significant interest rate cuts were “quickly dashed by the trade war, and ensuing loss of confidence,” Hogue said.

In earlier commentary, he warned that tariff risks could “spook” buyers and hand even more pricing power to those still active.

Subdued resales, sharper splits by region

In Toronto, an early winter “became the latest roadblock to the Greater Toronto Area’s recovery,” with resales falling for the fourth time in five months and remaining about 25% below pre‑pandemic levels.

“Resales remained stalled in December, sustaining significant downward price pressure amid abundant inventory and fierce seller competition,” Hogue said.

Prices also retreated in Vancouver and Calgary, where a “doubling in homes for sale since 2022” and a historic ramp‑up in homebuilding to a record 26,000 units under construction weighed on values.

Hogue said he expected “home values to continue easing in the short term as more supply comes to the market.”

Montreal, meanwhile, “went through a soft patch.” Resales slipped late in the year, but inventory remained historically tight and single‑family prices were still up 7.8% year over year, outpacing condos.

Rate cuts, but limited relief for borrowers

RBC’s latest housing forecast stressed that the Bank of Canada’s rate cuts since mid‑2024 have “yet to fully play out,” even as they helped set the stage for a gradual recovery.

Hogue previously said that “recent signs of an ongoing recovery have emerged,” but cautioned that high costs and weaker immigration would keep the rebound “gradual” at best.

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CMHC's mortgage rule change leaves builders and investors in limbo

A sudden policy shift by Canada Mortgage and Housing Corporation (CMHC) has left builders and real estate investors scrambling, as the agency moves to block bundling single-family home purchases under its Mortgage Loan Insurance Select (MLI Select) program. Critics argue the unexpected change may jeopardize millions of dollars in planned housing projects.

At the end of February, CMHC informed lenders that it would no longer approve MLI Select applications unless at least five rental units were in the same building and on the same lot. Previously, investors could bundle adjacent single-family, semi-detached, and townhouse properties into a single application.

This financing model helped insure 206,157 housing units, generating $47 billion in “insured volume” during the first three quarters of 2024.

Industry backlash

Investors and mortgage brokers say the change came without consultation, leaving many deals stranded. Tawfiq Abdulsamad, an Edmonton investor, said he was blindsided after CMHC rejected his application to finance three detached homes with basement apartments—totalling six rental units—under MLI Select.

“I heard from other people that had purchased the detached product in the past that the CMHC just started declining without saying anything,” Abdulsamad told the Globe and Mail, noting he would not have bought these properties if he had known traditional financing was his only option.

The rejection means Abdulsamad must seek alternative financing, requiring a 20% down payment or costly private lending.

Jake Steinman, CEO of Meta Realty, said his firm has at least 10 deals covering 100 units—valued at $35 million to $40 million—now in jeopardy. He estimates up to $50 million in deposits have been paid for properties that may not secure comparable financing.

“No one ever thought CMHC was going to pull the rug,” Steinman said.

CMHC’s justification

CMHC denies the new restrictions constitute a policy change, calling it a “clarification.”

“We had seen a slight increase in the complexity of projects where properties with less than five housing units were being bundled,” said CMHC spokesperson Monique LaPlante. “Our clarification sought to provide an enhanced understanding of our expectations.”

Some industry experts believe CMHC is trying to prevent large commercial investors from dominating the market.

“The typical profile of someone buying between five- to 10-units was they tended to be investors that already had investments in residential single family, or duplexes. This was often their first foray into a commercial mortgage,” said Nadeem Keshavjee, president of GreenBirch Capital Inc.

Impact on housing

Industry groups warn the new restrictions will slow rental housing development. Scott Fash, CEO of the BILD Alberta Association, said the change will limit buyers and reduce rental construction in 2025 and criticized CMHC’s handling of the shift, arguing existing applications should have been grandfathered in.

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Canadian employers hold pay gains as mortgage stress lingers into 2026

Most large Canadian employers plan to keep salary increase budgets for 2026 at 2025 levels, even as workers and mortgage borrowers continue to grapple with elevated interest rates and stubborn inflation.

According to Mercer’s October 2025 QuickPulse CA Compensation Planning Survey of more than 460 organizations, companies expected to hold average merit raises at 3.0% and total salary increases – including promotions, cost-of-living and other adjustments – at 3.3% next year, matching what they delivered in 2025.

Those projections point to only modest income growth for households already squeezed by higher mortgage payments and renewal risk.

Employers in consumer goods, non‑manufacturing and energy project average total increases below the 3.3% national benchmark, while chemicals and high‑tech organizations expect to come in higher, at 4.0% and 3.8% respectively. 

“Despite lingering uncertainty in the Canadian economy, companies were still spending money to attract and retain employees,” said Elizabeth English, senior principal in Mercer Canada’s career products business.

“Companies should consider allocating a higher percentage of their compensation budget increases to areas with skills that are in high demand to help address talent needs.”

At the same time, 66% of organizations said the broader economy would have a moderate or significant impact on compensation decisions in 2026, and 80% indicated they would distribute salary increase budgets equally across the organization rather than tilt them toward scarce skills or hard‑to‑fill roles.

Promotion activity also looks set to slow, with employers planning to promote about 8.7% of their workforce in 2026, down from 9.8% in 2025, with average promotional bumps of 9%. 

AI and automation, meanwhile, appeared to have had limited impact on hiring and pay decisions so far. Only 1% of respondents cited AI as a reason for reduced hiring, and just 3% said they were proactively planning headcount changes tied to AI.

“While AI was changing the way many employees and companies worked, there was still a critical need for human beings to use the tools and provide their judgment,” said Teresa Palandra, Mercer’s Canada president.

“Most companies were using AI to help employees be more productive, rather than replace people all together, which explained the limited impact of AI on compensation and hiring decisions so far.”

For mortgage professionals, the flat pay picture lands against a backdrop of sticky inflation and a higher‑for‑longer rate environment. Market participants recently expected inflation to remain above 2% through 2025 and 2026, drawing on Bank of Canada surveys.

In a separate analysis, Desjardins noted that the Bank of Canada is expected to hold its policy rate steady for an extended period as it waits for further progress on core inflation, underscoring the prospect of prolonged strain on indebted households.

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Here's what economists say about rate cut chances after latest GDP slide

Canada’s economy took another step back in October, raising fresh questions for mortgage professionals about how long subdued growth and softer demand might persist.

Statistics Canada reported that GDP contracted by 0.3% month over month, with output down in 11 of 20 industries. Goods production fell 0.7%, led by a 1.5% drop in manufacturing and a 0.6% pullback in mining, oil and gas, while services output slipped 0.2%.

Advanced guidance pointed to only a 0.1% rebound in November, implying essentially flat growth for the fourth quarter.

CIBC economist Andrew Grantham said the economy “appears to have slipped into reverse again during the fourth quarter, as a decline in activity during October was followed by only a partial recovery in November's advance estimate.”

He added that “growth in the second half of the year still appears slightly higher than the Bank of Canada assumed in October's MPR projection,” and that today’s data “doesn't change our forecast for the Bank of Canada overnight rate to remain steady at its current level for the foreseeable future.”

Soft growth, firm hold

TD Economics’ Marc Ercolao highlighted the breadth of the slowdown, noting that “11 of 20 industries registered a decline on the month,” with goods industries reversing out the prior month’s gain while services “contracted by a smaller 0.2% m/m.”

He said “overall economic growth will remain subdued over the next quarter or two before gradually recovering over the medium-term,” and that the data did not appear likely to shift the central bank from its current stance.

BMO senior economist Robert Kavcic struck a similar tone. “All told, this is pretty soft momentum to start off Q4,” he wrote, warning that the economy “has some work cut out to avoid another negative print for the final quarter of the year” and that this would “close out a very choppy year for Canadian growth in still-choppy fashion.”

Little appetite for more cuts

For markets focused on the Bank of Canada’s next move, economists generally framed the GDP stumble as another sign of slack, not a trigger for renewed easing.

“This is unlikely to materially change the outlook for monetary policy,” said Stephen Brown, deputy chief North America economist at Capital Economics.

“Nonetheless, the economy's lack of momentum reinforces our view that markets have gotten ahead of themselves in terms of pricing in interest rate hikes for next year.”

Oxford Economics’ Michael Davenport warned that “the Canadian economy is skating on thin ice in Q4… we expect weak underlying momentum to carry through H1 2026,” pointing to persistent tariff uncertainty and the lagged impact of past rate increases on households and investment. 

The Bank of Canada’s final rate decision of 2025 noted that the policy rate ended the year a full percentage point lower than a year earlier, after four 25‑basis‑point cuts, as the Bank sought to support an economy buffeted by tariffs and softening growth.

Growth remains too weak to re‑ignite demand, but not weak enough to force another rapid round of rate cuts. That left borrowers and lenders facing a protracted period of subdued activity, modest relief on servicing costs and an economy still working through “choppy” adjustment rather than any quick return to robust expansion.

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Canada’s housing relief slows as affordability rebound hits a wall

Canada’s long‑awaited housing affordability relief has continued into the third quarter of 2025, but new analysis from RBC Economics suggested the recovery phase is nearly spent, leaving brokers to navigate a market still far more expensive than before the pandemic.

RBC’s national aggregate affordability measure stood at 53.2% in Q3, down from a peak of 63.5% in 2023, meaning the share of pre‑tax household income needed to carry ownership costs has fallen for seven straight quarters.

Yet the the measure declined by just 0.4 percentage points in Q3, compared with an average 1.7‑point drop in the prior six quarters, according to RBC.

“Series of interest rate cuts since mid‑2024 and falling prices in parts of the country have significantly lowered ownership costs in the past seven quarters,” RBC assistant chief economist Robert Hogue said in the report.

“But, they’ve only partly reversed the historic spike from soaring prices during the pandemic, and the central bank’s aggressive rate hike campaign to fight inflation.”

RBC said Vancouver and Toronto – where prices have been falling this year – accounted for most of the national improvement, with Victoria, Halifax and Saint John also seeing better conditions, while “all other markets we track saw little or slightly unfavourable changes.”

In Vancouver and Victoria, mortgage carrying costs still sat 24 and 19 percentage points above late‑2019 levels respectively.

Hogue warned that “we’re likely approaching the end of the recuperation phase” as the Bank of Canada’s rate‑cut cycle wound down and policy rates are expected to hold through 2026.

Further “meaningful advancement would require steeper price declines or more robust income increases – neither of which seem likely under our base case forecasts.”

Regional affordability divides also persisted. RBC’s latest figures showed Regina with the best affordability among tracked markets, at 26.4%, while Victoria and Vancouver remain near the top of the cost spectrum at roughly 68% of household income.

Toronto, despite recording the largest Q3 decline, still requires 64.9% of income to own a typical home – a level RBC said meant “only a small minority of households could afford owning a home.”

As Hogue previously said, improvements could maybe reverse half of the loss during the pandemic, but still not going to be back to what it was before the pandemic.

With rate relief largely priced in and income growth slowing, the next phase for the market looks set to be slower, more uneven, and heavily dependent on how local prices and supply adjust from here.

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