Canada’s housing market is firming up, RBC says

RBC economist Rachel Battaglia says the improvement in Canadian housing affordability over the past two years is nearing an end as housing markets begin to strengthen.

Speaking with RBC senior economist Claire Fan on the Oct. 22 episode of The 10-Minute Take podcast, Battaglia said lower home prices and declining interest rates have provided some relief, but those conditions are beginning to reverse.

“We have seen some firming in the market under the surface already,” Battaglia said.

She said home prices are still declining, but the pace of those declines has slowed. Meanwhile, longer-term fixed mortgage rates have started rising in anticipation of future Bank of Canada rate hikes. “So those two things together, the firming of prices and rate hikes, should put an end to the affordability gains that we have seen over the last two plus years,” she said.

RBC measures housing affordability as the share of pretax household income needed to cover ownership costs, including mortgage payments, property taxes and utilities. Battaglia said affordability reached its worst level on record in late 2023, when ownership costs for a benchmark-priced home exceeded 60% of typical household income nationally. That was roughly double the commonly recommended 30% threshold, with affordability considerably worse in Toronto and Vancouver.

Housing conditions subsequently improved as higher borrowing costs, slower immigration and economic uncertainty weakened demand.

Battaglia said the market now appears to be approaching another turning point. Businesses are adapting to trade uncertainty, labour market conditions are showing signs of improvement and fewer newly completed homes are entering the market following a slowdown in construction starts. Those developments could support firmer home prices over the coming quarters.

However, Battaglia said housing conditions continue to vary significantly across Canada.

“Ontario and B.C. are definitely at the epicenter of the housing market correction,” she said. Both provinces have experienced larger price declines than other regions, reflecting weaker labour markets, slower population growth and trade-related economic pressures. Battaglia expects some of those headwinds to ease, helping stabilize housing markets in both provinces.

By contrast, parts of Quebec, Atlantic Canada and the Prairies largely avoided the post-pandemic correction, with prices continuing to rise. “Now it looks like buyers are hitting some sort of an affordability wall,” she said.

As a result, resale activity is beginning to soften in some of those markets, even as Ontario and British Columbia show signs of recovery. Battaglia said deteriorating ownership affordability could keep more Canadians in rental housing longer, although she does not expect significant near-term pressure on rents. “There’s still a lot of rental projects in the pipeline,” she said.

She expects slower population growth, combined with a steady supply of new rental units, to keep rental market conditions relatively soft. “And so that slow-growing renter base paired with lots of new units coming online should keep rents pretty soft. At least that’s our base case,” Battaglia said.

The economist also pointed to changing household preferences, particularly the growing number of Canadians choosing to live alone, as another factor extending the time people spend renting. “Deteriorating housing affordability, though, has absolutely pushed people to rent for longer,” she said.

Battaglia said single-income households face particular challenges entering expensive housing markets, suggesting affordability and lifestyle choices will continue influencing rental demand.

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