Falling benchmark prices and cautious optimism define the outlook for Canada's mortgage sector
Canada’s housing market, while recently showing “some verve,” continued to grapple with a persistent supply glut and falling benchmark prices, according to a new analysis from Andrew Hencic, director and senior economist at TD Economics.
The report highlighted that although home sales have climbed for five consecutive months, overall activity remained “soft by historical standards” and the outlook for a strong recovery was muted.
“A small recovery in the coming months will help, but we don’t expect boom times to return,” Hencic said.
Consumer spending defies weak labour market
Despite a sluggish first quarter in 2025, Canadian consumer spending has remained “remarkably robust,” Hencic said, attributing the resilience to lower interest rates that have encouraged households to spend rather than save.
“Lower interest rates have tilted the math towards spending in households’ spend vs. save decisions, helping to cushion the economy from a slowing labour market and subdued housing market,” he said.
Spending surged 4.5% in Q2, even as the household savings rate fell by 2.2 percentage points since late 2024 .
Hencic noted that while debt service ratios have eased from their 2022 highs, the benefits of lower borrowing costs have not primarily flowed into housing. Shelter spending, including rent and imputed rent, has grown more slowly than in past cycles, with weak population growth cited as a contributing factor.
Risks and outlook for mortgage professionals
Looking ahead, Hencic cautioned that household spending growth is expected to run below trend, with income growth and the labour market weakening.
“We’re looking for consumer spending growth to moderate in the coming quarters as downbeat economic sentiment and slower income growth act as drags,” he said.
The driving force behind the figures is expected to be a further drawdown in the savings rate, with upside risks stemming from a sharper housing recovery or faster debt accumulation.
The analysis also flagged the potential impact of upcoming mortgage rate resets and a modest rise in loans in arrears. However, Hencic pointed out that “stress tests appear to have worked as intended to prevent a major wave of defaults, and recent income and wealth gains have created some wiggle room for borrowers to navigate resets.”
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