New federal mortgage policies will boost Canadian home prices in 2025: TD
The paper, by economist Rishi Sondhi, published Wednesday, says that “both Canadian home sales and average home prices will likely be about two to four percentage points higher” by the end of 2025 than they would have been without the new federal policies.
New federal housing policies are anticipated to push average home prices higher next year while also leading to “affordability erosion,” which will ultimately slow down both sales volume and price growth, according to a recent analysis by TD Economics.
The report, authored by economist Rishi Sondhi and published on Wednesday, predicts that “both Canadian home sales and average home prices will likely be about two to four percentage points higher” by the end of 2025 compared to what they would have been without the new federal policies.
“However, by the end of 2026, the affordability erosion resulting from these policies will have diminished the initial boost to sales, leaving prices only slightly elevated compared to what they would have been otherwise.”
The new federal housing policies, announced in September, are set to take effect on December 15. These policies raise the cap on insured mortgages from $1 million to $1.5 million, which reduces the minimum down payment for homes priced in that range. They also permit first-time homebuyers and buyers of new constructions to secure loans with a 30-year amortization period.
Overall, Sondhi states that the impact of these new measures will be relatively limited and should not “unleash a housing boom” by themselves. Instead, they will provide “a secondary tailwind” that complements the already improving economic conditions and lower interest rates affecting the market.
These policy changes come amid a persistent affordability crisis caused by various factors, including population growth, slow new construction, and inflation. While shelter inflation has begun to ease, Desjardins economist Randall Bartlett noted that it “continues to contribute the most significantly to headline inflation.”
Despite several interest rate cuts by the Bank of Canada, the housing market in Canada has remained largely flat, with the Canadian Real Estate Association stating this week that the market is expected to stay in a “holding pattern” until next spring.
Sondhi asserts that the effects of the extended amortization period will be “blunted” since it only applies to first-time homebuyers obtaining an insured mortgage.
“Moreover, only about 20 percent of mortgages issued this year fall within the insured category, although we acknowledge that this share is likely to increase following these policy changes.”
GTA Market Expected to Benefit from Higher Insurance Cap
On the other hand, raising the ceiling on insured mortgages to $1.5 million could lead to “a sizeable boost to activity,” as around 20 percent of homes fall into the expanded range. This benefit is expected to be most pronounced in the Greater Toronto Area (GTA), where the median home price was $1.2 million in August. Vancouver may also see advantages, although Sondhi points out that “a disproportionate number of homes in Vancouver exceed this price threshold.”
Additionally, the TD analysis highlights that the household income required to qualify for a mortgage with the minimum down payment rises as home prices increase.
“For instance, a buyer making the new minimum down payment for a home valued at $1.05 million will need a household income of approximately $170,000 to $180,000 to meet standard qualification criteria,” the report noted. “This may be challenging for many first-time homebuyers.”
Sondhi also mentions that various factors could impact the market’s trajectory next year. The anticipated rise in market activity may be delayed if more individuals wait for the federal policies to take effect. The market could respond more positively to the policies than expected, possibly alongside additional interest rate cuts.
The projections also raise “the potential for some fragility to be introduced into the broader financial system,” Sondhi writes. He refers to Bank of Canada research indicating that borrowers with higher loan-to-value ratios are more likely to default, and that longer amortization periods “are associated with a greater likelihood of financial stress.”
