Yahoo Finance New federal mortgage policies will boost Canadian home prices in 2025: TD
New federal housing policies will likely drive average home prices higher next year, but also cause “affordability erosion” that will eventually slow sales volume and price growth, according to a new analysis by TD Economics.
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.
“However, by the end of 2026, the affordability erosion resulting from these policies will have eaten away at the initial lift to sales, and leave prices only marginally above whether they would have been otherwise.”
The new federal housing policies, announced in September, take effect on Dec. 15. They raise the cap on insured mortgages from $1 million to $1.5 million (reducing the minimum down payment required for homes in the $1 million to $1.5 million range). They also allow first-time homebuyers and purchasers of new builds to take a loan with a 30-year amortization period.
Overall, Sondhi writes, the new measures will be somewhat limited in their scope and shouldn’t “unleash a housing boom” on their own. Rather, they will “offer a secondary tailwind” that compliments the lower interest rates and improving economic conditions already stirring the market.
The policy changes come in the midst of an ongoing affordability crisis driven by a number of factors, including population growth, sluggish new construction, and inflation. Shelter inflation has begun to slow, but, as noted by Desjardins economist Randall Bartlett, it “continues to make by far the largest contribution to headline inflation.”
Canada’s housing market has remained relatively flat in spite of several Bank of Canada interest rate cuts, with the Canadian Real Estate Association saying this week it expects things to stay in a “holding pattern” until next spring.
Sondhi writes that the effects of the extended amortization period will be “blunted” because it is limited to first-time homebuyers taking out an insured mortgage.
“Moreover, a relatively small 20 per cent of mortgages issued this year have been in the insured space, although we acknowledge the likelihood of a probable increase in this share in the wake of these policy changes.”
GTA market likely to benefit from higher insurance cap
Raising the ceiling on insured mortgages to $1.5 million, on the other hand, could cause “a sizeable boost to activity” because some 20 per cent of homes are in the expanded range. The benefit will likely be highest in the Greater Toronto Area, where Sondhi notes the median home price in August was $1.2 million. Vancouver could also benefit, but Sondhi observes that “an outsized number of homes in Vancouver are priced above this threshold.”
Furthermore, the TD analysis points out that the household income required to qualify for a mortgage with a minimum down payment increases as the home price rises.
“For instance, a buyer who puts down the new minimum down payment required to buy a home valued at $1.05 million will need a household income of about $170-180k to meet typical qualification thresholds,” the paper said. “This would be difficult for many first-time homebuyers.”
Other factors could also influence the trajectory of the market next year, Sondhi writes. The projected increase in market activity could happen later than expected if more people wait for the federal policies to take effect. The market could also respond more enthusiastically to the policies than projected, perhaps in tandem with further interest rate cuts.
The projections also create “the potential for some fragility to be introduced into the broader financial system,” Sondhi writes. He notes Bank of Canada research that shows delinquency is more likely for borrowers with higher loan-to-value ratios, and that longer amortization periods “are associated with a greater probability of financial stress.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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