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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Why 2026 could test Canada’s variable‑rate borrowers

Variable mortgage borrowers enjoy the sharpest rate declines since the Bank of Canada (BoC) started cutting in mid‑2024. But that window now looks set to narrow, with Desjardins warning that “the recent enthusiasm for variable rate mortgages may wane in 2026, especially if borrowers start anticipating new rate increases.”

In an economic viewpoint, Hendrix Vachon, principal economist at Desjardins, noted that the BoC had cut by 175 basis points in 2024 and a further 100 basis points in 2025, bringing the policy rate to 2.25%.

“While there is still a great deal of economic uncertainty, it’s not enough to justify further monetary easing, and the BoC still considers inflation risks to be overly high,” he said.

Variable mortgage pricing has moved quickly. “Variable rates on new insured loans were around 7.00% in June 2024 and are now slightly below 4.00%,” Vachon said.

Those reductions outpaced fixed terms because discounts to prime widened, with the spread between prime and the effective variable rate exceeding 50 basis points for new insured loans.

Fixed mortgage rates, by contrast, remain tethered to bond markets. The 5‑year Government of Canada yield “fell about 100 basis points lower in 2025, but had climbed back to around 3.00% in December,” Vachon said.

Desjardins estimated that 5‑year mortgage yields typically sat “about 20 points higher than Canadian government bond yields,” with securitization via Canada Mortgage Bonds helping insured borrowers access lower rates.

Vachon cautioned that “for 2026, the outlook is currently less favourable for variable rates.”

With the BoC on pause, “variable interest rates will remain stable in the quarters ahead. They could even rise in the coming years if the BoC announces a policy rate hike.”

Desjardins’ baseline assumed the long‑term neutral rate near 2.75%, implying “variable interest rates could go up around 50 basis points from their current level,” and projected two 25‑basis‑point hikes in 2027.

Borrower behaviour has already shifted. Before the pandemic, around 30% of new financing was in 5‑year‑plus fixed terms.

From 2022 to 2025 that share hovered nearer 15%, even though “rates for 5‑year fixed rate mortgages were on average 40 basis points lower than rates for mortgages with shorter terms” in 2023.

Instead, fixed terms between three and five years climbed from less than 20% of originations pre‑COVID to above 50% in 2024, remaining near 40% in 2025 as borrowers bet on lower renewal rates ahead.

Vachon earlier warned that “rapidly rising interest rates could seriously hurt the housing sector and drag other sectors of activity with it,” underscoring the risks on the other side of today’s low‑rate cycle.

With policy easing largely behind the market and modest hikes on the horizon, the relative advantage of variables over shorter‑term fixed products looks slimmer. Experienced brokers and lenders would need to stress‑test clients not just for today’s discounts, but for a rate path that could edge higher just as renewals start to roll in.

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TD sees resilient provinces reshaping Canada’s uneven housing recovery

TD Economics’ latest provincial outlook painted a picture of resilience, not boom times, for Canada’s economy and housing market in 2025–26 – with important implications for lenders and brokers.

The analysis suggested that while growth leaders such as Alberta, Saskatchewan, PEI and Newfoundland and Labrador stand to outperform, central provinces including Ontario, Quebec and Manitoba are expected to lag under the weight of a prolonged trade war and softer housing conditions.

Across the country, TD said job markets have “turned in a more resilient performance than we had expected in September,” with downside surprises in unemployment especially notable in Ontario, Alberta, Quebec, New Brunswick and PEI.

It still expects unemployment rates to “broadly peak by Q1‑2026 before drifting lower thereafter.”

Population growth, meanwhile, is projected to slow sharply as tighter federal immigration policy constrained labour supply and eased rent pressures, particularly in Ontario, BC and Quebec.

Resilience becomes the new watchword

TD’s baseline view is that “significant regional variations will exist as Canada’s housing market continues its gradual improvement next year,” with price growth likely to lag “significantly in Ontario and, to a lesser extent, B.C.” in the face of looser supply‑demand conditions.

In contrast, Quebec and the Prairies are expected to see “firmer price gains, underpinned by tight conditions, and decent affordability (in the Prairies).”

That provincial split echoes TD’s dedicated housing-market work, which framed the national picture as “a gradual, modest recovery in the housing market” over 2025–26.

Housing outlook splits along regional lines

TD economist Rishi Sondhi previously said “elevated uncertainty and a deteriorating jobs market will yield subdued sales and price growth for much of 2025,” with prices expected to fall most in Ontario (down 6.4%) and British Columbia (down 4.1%).

Manitoba, Saskatchewan and Alberta were projected to “outperform slightly, thanks to tighter supply and comparatively better affordability.”

Canada Mortgage and Housing Corporation highlighted that trade tensions and tariffs were “reshaping Canada’s housing market and growth outlook through 2025,” with resale markets softest in Ontario and BC while Quebec’s housing activity slowed less than elsewhere.

For mortgage professionals, growth and housing activity look set to remain uneven, but this is a slow‑grind adjustment rather than a cliff edge – rewarding lenders and brokers who tailor risk appetite, product design and distribution strategies to sharply diverging regional realities.

CMP

We hope you are finding our Blog informative and enjoyable to read while keeping you up to date with the ever changing real estate market. 

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Could variable-rate mortgages be poised to bounce back in 2026?

Ratehub.ca has released its 2026 mortgage market predictions, with insights from mortgage expert Penelope Graham forecasting a shift toward variable-rate products as fixed-rate borrowers face significant payment increases upon renewal.

Variable-rate mortgages have fallen below fixed rates for the first time since 2022. The lowest five-year variable option in Canada stands at 3.45%, compared with the current fixed low of 3.94%, a 49-basis-point difference that may widen further throughout 2026.

“In 2025, borrower interest in variable rates rose as the Bank delivered additional rate cuts over the autumn months; on a year over year basis, the number of inquiries for variable-rate mortgages on Ratehub.ca increased by 25.7% year over year accounting for 11.5% of all inquiries, compared to just 7% in 2024,” noted Graham.

Fixed-rate renewals face steep increases

Homeowners renewing fixed-rate mortgages in 2026 will face substantially higher payments than under their expiring terms. According to Ratehub.ca’s calculations, a homeowner who purchased a $607,280 home in December 2020 with a 10% down payment and a five-year fixed rate of 1.39% would have paid $2,224 per month.

When renewing in December 2025, that same homeowner would face a monthly payment of $2,800 at today’s best renewal rate of 3.94%, an increase of $576 per month, or 26%.

Variable-rate borrowers are expected to experience a more modest impact. Those renewing from a December 2020 variable rate of 0.99% would see their monthly payments rise by $107, or 4%, to $2,797.

Bank of Canada signals rate hold

The Bank of Canada has adopted a rate-hold stance heading into 2026. In both its October and December rate announcements, the Bank’s Governing Council emphasized that the current policy rate is “about right” to support economic conditions.

“Surprisingly strong GDP and labour numbers at the end of the year also show there’s little need for the Bank to heap on additional stimulus at this time – and won’t need to in the year to come, should the economy perform as the Bank has forecasted,” said Graham. “Overall, the Bank expects inflation — a key pillar of its decision making – to remain close to its 2% target in 2026, before trending upward at year’s end as the economy strengthens, which may open the door to a rate increase in early 2027.”

Housing market remains sluggish

Canada’s housing market underperformed expectations in 2025, Graham noted. US tariff threats and broader market volatility pushed many buyers into decision paralysis, contributing to steadily rising inventory in major real estate centres.

Home prices have yet to reheat, though they remain well above incomes in most large markets. With the Bank of Canada maintaining its rate hold, limited rate relief on the horizon is expected to do little to stimulate demand.

Graham suggests motivated buyers may face favourable conditions, with ample listings and mortgage rates appearing to have bottomed out, potentially leading to a modest post-holiday increase in activity.

CMP

We hope you are finding our Blog informative and enjoyable to read while keeping you up to date with the ever changing real estate market. 

Please feel free to contact me via Direct/Text or e-mail at any time and my team will be pleased to assist you, family members and friends with all your real estate needs. Referrals are always welcome and rewarded!