The Canada housing bubble is looming, with poor affordability and low availability of housing since the pandemic. The market didn’t crash in 2024 and isn't expected to crash in 2025 either, although supply and demand challenges are ongoing.
Homeowners, prospective buyers, prospective sellers, and renters face unique challenges. Expert predictions are cautiously optimistic about a new and improved market for the rest of 2025, though the Canadian housing market remains precarious.
Key Takeaways
- The Canada housing bubble did not burst in 2024.
- Prices continue to rise in 2025, but lower borrowing rates may lead to more activity.
- Increased supply may take the pressure off in some areas of Canada.
- Regulations like the mortgage stress test help protect Canadians and the economy from a crash.
What is a housing bubble?
There are two key aspects of a housing bubble, where property prices are artificially high:
- Not enough homes on the market
- Home prices are too high to afford
Experts disagree about whether Canada is currently experiencing a housing bubble, but the housing market is undeniably precarious and unaffordable across the country.
A housing bubble bursts when the situation changes so that supply re-aligns with demand. This could be due to new laws, new constructions, or economic growth. Whatever the reason, though, it results in a big dip in average housing prices and the number of homes listed for sale.
Housing bubbles are temporary. There have been a few bubbles in recent history, including the U.S. in the mid-2000s and Canada in the late 1980s. The economy has always recovered after a burst.
Canada's housing bubble: 2025 update
In the first quarter of 2025, Canada's housing market remains under scrutiny for potential bubble conditions. Toronto ranks fifth globally in real estate bubble risk, according to the UBS Global Real Estate Bubble Index, highlighting concerns over overvaluation.
Nationally, home prices have shown modest increases, with a 2% rise projected for the rest of 2025, slightly below the expected inflation rate of 2.1%. Factors such as high household debt, rising interest rates, and economic uncertainties contribute to market volatility.
As of May 2025, it continues to be a seller’s market across most of Canada.
- Average home price in 2025: As of March 2025, the national average home price is $678,331, reflecting a 3.7% decrease from March 2024.
- Home sales in 2025: The CREA projects approximately 482,600 residential property sales in 2025 (essentially unchanged from 2024 levels), indicating a stabilization in market activity.
- Provincial pricing trends: BC and ON continue to have the highest home prices, although prices are declining in both provinces due to lessening demand. Conversely, provinces like NB and SK remain the most affordable, with average prices of $343,027 and $338,869, respectively, as of March 2025.
Toronto's elevated bubble risk
Toronto is ranked the fifth most at-risk city in the world for a housing bubble, according to the Financial Post. It’s considered more vulnerable than cities like Hong Kong and Amsterdam, showing how exposed the market is to a potential downturn.
Several factors contribute to Toronto's elevated bubble risk:
- High price-to-income ratios: The gap between housing prices and average incomes has widened, making homeownership increasingly unaffordable for many residents.
- Speculative buying: A surge of investors and speculative buyers has driven up demand, further inflating property values beyond sustainable levels.
- Low Interest Rates: Prolonged periods of low interest rates have encouraged borrowing and investment in real estate, contributing to price surges.
Implications for the market
These factors suggest that Toronto's housing market is headed for a downturn. Potential triggers include interest rate hikes, changes in lending policies, and/or changing investor confidence.
A downturn like this could lead to decreased property values and reduced market activity.
Homebuyer outlook: Affordability still tight
Homebuyers are still struggling with high costs in 2025. Although interest rates have dropped a bit – with the Bank of Canada (BoC) lowering its key rate to 2.75% – home prices are still high. On average, home prices across Canada are expected to go up by around 2% this year.
New mortgage rules introduced in 2024 allow 30-year amortization periods for insured mortgages, with price limits raised to $1.5 million.
Homeowner outlook: Mortgage renewals bring challenges
Homeowners renewing mortgages in 2025 will find the rates are significantly higher than their initial terms, especially if they secured low rates during the pandemic.
The Office of the Superintendent of Financial Institutions (OSFI) expects mortgage renewals to strain household budgets, which could lead to lower consumer spending and reduced business investment.
To assist homeowners, new rules permit insured refinancing up to 90% of a property's value. This offers more flexibility for those needing to adjust their financial arrangements.
Renter and landlord outlook: High demand persists
Renters in Ontario continue to face a challenging market where high demand and limited supply keep rental prices elevated. Although vacancy rates have slightly increased in some areas, the overall rental market remains tight.
Ontario's rent control regulations only apply to rental units first occupied for residential purposes before November 15, 2018. Units occupied after this date are exempt, allowing landlords to increase rents without adhering to the annual guideline.
To address housing affordability, the federal government introduced the Affordable Housing and Groceries Act in 2023. This legislation provides a temporary 100% GST rebate on new purpose-built rental housing projects that begin construction between September 14, 2023, and December 31, 2030. The purpose is to incentivize the construction of new rental units and increase housing supply.
These measures aim to improve rental housing, but their effect on affordability and supply will depend on how quickly and widely new projects are built.
Top cities where prices might drop in 2025
Some Canadian cities are experiencing price corrections:
- Toronto: Condo prices have fallen to multi-year lows.
- Saskatoon: Average home prices decreased by 6% from February 2024 to March 2025.
- Vancouver: Most home types have decreased in price in 2025.
- Calgary: Monthly home sales are declining in general, and the average price of semi-detached homes is also decreasing.
Will the Canada housing bubble crash?
Experts are cautiously optimistic that Canada will avoid a crash, but they certainly can't make guarantees.
Maybe yes: Government officials and real estate companies are eyeing a possible Canada housing bubble burst. RBC states that a housing bubble burst is the fastest way to restore affordability.
The CMHC predicts that home sales in 2025 will surpass the past 10-year average, with prices continuing to rise.
Maybe no: Canada has learned from past market crashes, implementing new policies like mortgage stress tests to safeguard the economy. Inflation is slowing and interest rates are trending down, which points to stabilization.
If the housing market does crash, Canada may experience:
- Lower consumer spending
- More mortgage defaults
- Difficulty selling or refinancing
- General economic downturn
According to Real Estate Magazine, it’s not all doom and gloom. A crash with housing shortages could lead to positive developments like better public transit and more communal living.
How much income do you need to buy a house in Canada?
The general rule is that your housing costs should not exceed 30% of your income.
As an example, if your monthly income is $4,000, then your total monthly housing costs should not exceed $1,200.
Here's an overview of the approximate income needed to buy a house in Canada's major cities:
| City | Average Home Price | Annual Income Needed |
|---|---|---|
| Vancouver | $1,190,900 | $239,780 |
| Toronto | $1,068,500 | $215,488 |
| Victoria | $891,000 | $164,169 |
| Calgary | $583,400 | $108,555 |
| Halifax | $557,000 | $105,224 |
| Edmonton | $431,300 | $84,281 |
These figures are calculated assuming a 20% down payment and a 5-year fixed mortgage rate, aligning with Canada's mortgage stress test requirements.
Banks in Canada use a mortgage stress test to assess affordability. This test considers your salary, debts, expenses, and prospective home price to understand your financial situation. Then, the bank runs a calculation based on your borrowing rate plus 2% to see if you could handle a fluctuation in mortgage payments.
Working with a mortgage broker can be a huge help when looking for the best rates for your situation. We can’t recommend borrowing during a housing bubble, but a broker can help you negotiate the best deal if you’re ready to buy.
How interest rates impact Canada’s housing bubble
It's important to note that while interest rates have slightly decreased, affordability remains a significant challenge due to high home prices.
For instance, in Toronto, despite a slight drop in average home prices, the required annual income to afford a home has increased due to rising interest rates and stricter lending criteria.
These are a few other ways that interest rates are impacting the housing market:
Bank of Canada policy rate trends
On March 12, 2025, the BoC reduced its policy rate to 2.75% to stimulate economic activity amid low inflation.
Lower interest rates can increase borrowing capacity, potentially driving up home prices. However, high household debt levels may limit the effectiveness of rate cuts in boosting market activity.
Impact on borrowing and home prices
Lower interest rates usually make borrowing easier, which can increase the demand for homes. But this effect has been weak so far in 2025, and buyers haven’t rushed back into the market.
Despite the BoC's rate reductions, prices remain high, and it's still difficult to qualify for a mortgage. Unsurprisingly, home sales continue to lag.
Analysts suggest that economic uncertainty and cautious buyers are limiting the boost that rate cuts could have on the housing market.
Household debt and financial stability
As of December 2024, household debt accounted for approximately 99% of the country's nominal GDP. This suggests that household debt levels are very high compared to the country’s overall income.
The many Canadians facing mortgage renewals in 2025 will likely be facing significantly higher monthly payments than before, creating financial stress and increasing the nation's household debt. As noted by the OSFI, this could impact consumer spending across the country and negatively impact economic stability.
While the BoC's interest rate reductions in 2025 aim to boost the housing market, the impact is limited by affordability issues and high household debt. These factors continue to pose challenges for prospective homebuyers and existing homeowners.
Alternative paths to homeownership
With traditional homeownership becoming increasingly difficult, Canadians are exploring alternative options. These are a few examples:
- Co-ownership: When multiple individuals purchase a property together, they share costs and responsibilities. By pooling resources, individuals can afford properties that would otherwise be out of reach. This approach is especially popular among newcomers and young Canadians.
- Rent-to-own: These agreements allow tenants to save up for a down payment and eventually own the home they rent. A portion of the rent is typically credited toward the future purchase, making it a valuable option for those who can’t get a mortgage right away.
- Tiny homes: These compact, fully equipped homes offer a more affordable and sustainable living option. Small houses on wheels, micro homes, and even shipping container conversions are gaining popularity in Canada as they offer a money-saving opportunity for sustainable living.
- Relocating to smaller markets: Many Canadians are moving to new communities and even provinces where there are more affordable housing options. Cities like Saskatoon and Regina have had notable price decreases, making them attractive alternatives for prospective buyers.
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What is a housing bubble?
A housing bubble is an economic situation where the price of real estate assets is elevated above their intrinsic value. This occurs when there's an excessive amount of demand for the homes but not enough inventory to satisfy the need.
Is Canada in a housing bubble?
Most experts believe that Canada isn't in a housing bubble, but we're pushing it. Property prices have increased continuously since 2020, setting records every year. The average home price in Canada is now $678,331.
What happens when a housing bubble bursts?
When a housing bubble bursts and the market crashes, prices fall dramatically as the demand decreases. This means that real estate investments are suddenly not as valuable as they once were because of the listings and lack of buyers.
Is there a Toronto housing bubble?
Toronto now ranks 5th in the world at risk of a housing bubble. Whether it’s official or not, the GTA certainly remains a difficult market for buyers, sellers, and renters alike, with limited relief on the horizon for 2025.
Are there alternatives to buying a house in Canada?
There are numerous alternatives to buying a house. You can rent a property, refinance your current house, buy a "tiny home," relocate to a less expensive area, or simply wait until the housing market is favourable before purchasing a home.
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