Interest rate cuts and resilient consumer spending buoyed Canada’s housing market despite export setbacks
Canada’s economy faced a tough year as US trade policies and tariffs hit exports and business investment hard. Still, TD Economics’ latest forecast showed that housing stood out as a bright spot, thanks to lower interest rates and steady consumer spending.
“The country experienced its largest quarterly decline in exports outside of the 2009 Global Financial Crisis and the Covid-19 pandemic,” TD Economics said in its September 18 analysis. “Despite these challenges, robust consumer spending and an upswing in housing investment contributed to a hearty 3.5% rebound in domestic demand in the second quarter.”
The report noted that while the broader economy contracted by 1.6% in Q2, housing activity bucked the trend, responding quickly to Bank of Canada rate cuts and government support for purpose-built rentals.
Housing market outpaces expectations
The forecast revised residential investment growth upward for 2025, crediting both lower borrowing costs and targeted government financing programs. "The housing market responds to past (and likely some additional) Bank of Canada rate cuts and stronger construction activity is underpinned by purpose-built rentals," TD Economics said. However, the report cautioned that the long-term contribution of housing to overall growth will continue to be constrained by persistent affordability challenges and slower population growth.
Not all regions are benefiting equally. “The GTA [Greater Toronto Area] market is currently immersed in a severe slump amid a supply glut of condominiums,” TD Economics said, highlighting the uneven recovery across Canada’s housing markets.
The parliamentary budget officer warned that Canada must build 3.2 million new homes in the next decade to make housing affordable again, but the country is falling behind. The PBO expects about 227,000 new homes will be built each year until 2035—still 65,000 short of what’s needed annually.
“We know municipalities need funding to support the things that they’ve been trying to cover with the development charges,” Canadian Home Builders’ Association (CHBA) chief executive officer Kevin Lee told Canadian Mortgage Professional. “So there’s no question that we need alternative funding and financing models that the municipalities can make use of. Some of that can come from the federal government and the provincial government.
“But there are also other ways for municipalities to spread those things across the tax base in a better way. There are property taxes, which nobody likes to see go up, but they’re a more appropriate way to fund a lot of these infrastructure needs of entire communities and cities.”
Trade tensions weigh on outlook
TD Economics flagged the ongoing US-Canada trade dispute as a persistent drag on the outlook. “We no longer assume a trade agreement is reached between the two countries this year and that the current tariffs and exemptions remain in place throughout the forecast period,” the report said. As a result, “no substantial export recovery appears in the cards,” and business investment is expected to contract further, with the unemployment rate forecast to peak at 7.3%.
Despite the headwinds, the report pointed to potential upside risks, including possible boosts from federal infrastructure and defense spending. “Depending on how quickly outlays occur, there could be upside to our forecast that calls for a gradual improvement in real GDP growth to just under 2% by 2027,” TD Economics said.
