As Canada’s housing market enters 2025, one of the biggest questions on the minds of buyers and sellers is whether interest rate cuts will be enough to revive buyer demand.
With home sales declining across major markets and affordability concerns persisting, the Bank of Canada’s recent rate reductions are being closely watched as a potential catalyst for market activity.
The Numbers: Where Interest Rates Stand Now
In late 2024, the Bank of Canada cut its benchmark interest rate to 4.5%, down from its 5.25% peak earlier in the year. Economists predict further reductions throughout 2025, with some forecasting rates as low as 3.75% by the end of the year.
Mortgage rates have followed suit, with fixed-rate mortgages averaging 4.6%, compared to 5.5% earlier in 2024. While this decline has improved affordability slightly, home prices remain high, and many buyers are still hesitant to re-enter the market.
Can Lower Interest Rates Solve the Affordability Crisis?
Lower interest rates reduce the cost of borrowing, making it easier for buyers to qualify for larger mortgages. For example, a $700,000 mortgage at 5.5% would result in a monthly payment of approximately $4,290. At 4.6%, that payment drops to $3,960, saving buyers around $330 per month.
While these savings are significant, they may not be enough to offset the high cost of homes in cities like Toronto ($1.13 million average price) and Vancouver ($1.23 million average price). Many buyers are still struggling with down payments and other costs, making affordability a challenge despite lower rates.
Buyer Sentiment: Waiting for Further Cuts?
Many buyers are waiting on the sidelines, expecting further rate cuts before committing to a purchase. This has led to a slowdown in sales, with Toronto home sales dropping 19% in December 2024. The expectation of additional rate reductions could delay demand recovery, as buyers hope to secure even lower borrowing costs later in the year.
First-time buyers are particularly cautious, as affordability remains their biggest hurdle. With rent prices rising by 6.4% year-over-year, some renters are considering homeownership, but high down payment requirements and ongoing economic uncertainty are keeping them in the rental market for now.
A First-Time Buyer’s Perspective
Sarah, a 29-year-old teacher in Vancouver, has been renting for the past five years while saving for a down payment. With interest rates falling, she considered buying a one-bedroom condo for $720,000 but ultimately decided to wait. “I know rates are dropping, but prices are still really high. If rates go lower later this year, I might be able to afford a bit more,” she explained.
Sarah’s situation reflects the mindset of many potential buyers who are holding off in hopes of better affordability in the coming months.
How Sellers Are Responding
With buyers hesitating, sellers are adjusting their strategies to attract interest. While most have not significantly reduced their asking prices, there is more flexibility in negotiations, particularly in markets with rising inventory.
Some sellers are offering closing cost assistance, flexible closing dates, and price adjustments to secure deals. In Toronto and Calgary, where inventory levels have risen significantly, sellers of detached homes and condos are especially open to negotiations.
The Rental Market’s Impact
The rental market is thriving, with demand pushing prices higher in cities like Montreal, Vancouver, and Toronto. The average rent for a one-bedroom apartment reached $2,750 in December 2024, making homeownership look more attractive for some renters. However, with home prices still high, many would-be buyers are choosing to remain in the rental market despite falling interest rates.
For investors, the strong rental market has made income properties more appealing, leading many to hold onto their real estate rather than sell. This trend has prevented inventory from increasing dramatically, keeping prices relatively stable.
What to Expect for the Rest of 2025
The next few months will be critical in determining whether rate cuts translate into stronger buyer demand. If the Bank of Canada continues to lower rates, borrowing will become more affordable, potentially encouraging buyers to enter the market. However, if home prices remain high and affordability remains a concern, the housing market may continue to see slower sales and cautious buyer behavior.
Buyers who are waiting for further rate cuts may find increased competition later in the year if demand suddenly returns. Sellers, on the other hand, may need to adjust their pricing expectations if sales remain sluggish.
A Market in Transition
While lower interest rates are a step in the right direction for improving affordability, they may not be enough to fully revive buyer demand in 2025. High home prices, economic uncertainty, and changing buyer behavior are all factors that will shape the housing market’s trajectory.
For now, the market remains in a transition phase, where buyers are taking a cautious approach and sellers must adapt to evolving conditions. The coming months will reveal whether further interest rate cuts can reignite the market or if affordability challenges will keep demand subdued.
