Economy

Uncertain economic outlook amid geopolitical and immigration shifts

Canada’s economic future faces significant uncertainty due to potential changes in U.S. trade policies and lower immigration levels. Given this uncertainty, we do not identify a base case. Instead, we project three plausible scenarios and will monitor how things unfold against these scenarios over the year.

Significant uncertainty surrounds the future of U.S. trade tariffs on Canadian exports to the U.S., potentially reaching up to 25% on all goods, with the likelihood of Canadian retaliation. This could have a major impact on Canada's economy as early as 2025, including:

• investment uncertainty
• a weaker Canadian dollar
• lower export revenues
• job losses
• higher inflation
• a greater risk of recession

Our medium scenario assumes that the U.S. will impose a 25% tariff on 10% of Canadian goods, with Canada retaliating in return. In this scenario, the negative economic impacts may be softened by stronger U.S. government spending and higher U.S. demand for imports as a result.

Reduced immigration targets for 2025 – 2027 will also affect the economy. Slower population growth could lead to lower economic activity. We assume these targets to be met gradually, over several years.

Considering these factors, we expect modest economic growth in 2025 improving in 2026 and 2027. After declining in 2023 and 2024, GDP per capita should grow over the forecast period.

Figure 1: Canadian Economy Faces Significant Uncertainty
Canada Real GDP Forecast (Trillion $CAD)

Source: CMHC
The forecasts included in this document are based on information available as of January 14, 2025.

Similarly, we expect consumer spending per capita to increase over the forecast period, supported by lower borrowing costs. However, several factors will slow growth, notably:

• loss of purchasing power from past inflation, with incomes catching up gradually
• increasing unemployment rates in 2025
• higher interest rates on mortgage renewals in 2025 – 2026

Overall consumer spending will grow at a slower pace due to reduced population growth, leading to weaker overall economic demand. This limits the need for workers and slows job growth especially in 2025. As a result, we expect unemployment to rise until mid-2025. An improving economy and lower population growth will contribute to lower unemployment rates in 2026 and 2027. Government spending will also likely slow down with lower population growth.

We expect Canadian business investment to rebound over the forecast period after two years of weak activity. Lower interest rates will support this recovery. However, trade tariffs, rising wage pressures from limited population growth and tighter lending conditions from cautious lenders will limit the rebound.

To control inflation and support the economy amid new tariffs, the central bank is expected to further cut rates in 2025. Fixed-rate mortgages, linked to bond yields, already reflect many of these changes and will see small improvements. Variable-rate mortgages, tied to the policy rate, are expected to see bigger reductions, making them attractive to homebuyers.

The overall impact of this economic outlook on the housing market is mixed. Slower population growth and economic challenges will limit housing activity. On the other hand, some households will see improved buying power, boosting housing activity in the short term.

Housing markets

Affordability improvements release pent-up housing demand, supported by economic recovery later in the forecast

Despite the economic headwinds described above, we expect housing market activity in Canada to improve. The combination of lower mortgage rates and changes to mortgage rules introduced in 2024 should unlock pent-up demand from homebuyers previously priced out of the market. However, some of these homebuyers may face longer loan terms, higher interest costs over the duration of the loan and larger down payments as prices continue to rise.

Compared to new homes, we expect resale homes to attract a larger share of renewed demand as they offer more options for financially constrained homebuyers. In addition, the length of new construction projects may limit developers' ability to meet demand quickly.

Millennials, many of whom are first-time buyers, are currently driving housing demand. As remote work declines, we assume this group will prioritize being closer to jobs, boosting sales recovery in larger urban markets.

We also expect some repeat homebuyers to return to the market. This will include those looking to upgrade, taking advantage of lower mortgage rates. It also includes homeowners who purchased during the pandemic, facing mortgage renewals between 2025 and 2027. These factors may lead them to rethink their housing needs, driving sales activity.

The housing market recovery will be uneven with the condominium apartment market lagging especially in regions that depend on investor activity. Investors who bought pre-construction units to rent out are increasingly selling as costs rise faster than rental incomes. We expect listings to continue to increase, driven by record new condominium apartment completions in 2025 and softening rental markets.

Prices will grow faster in 2025, reflecting a recovery and renewed demand for ground-oriented homes, before slowing down in 2026 – 2027.

By 2027, we expect much of the pent-up demand to be met. Although mortgage payments and prices will rise, improved job markets and income growth will make housing more attainable than during the 2022 – 2024 period. This will support further recovery in sales.

More affordable regions will lead price and sales recovery

The housing markets in Ontario and British Columbia are particularly unaffordable. We expect sales in these markets to remain below their 10-year averages. This is due to ongoing affordability challenges and the more notable impact of new immigration targets. We expect prices to grow more slowly in these provinces, especially in the first half of the forecast period.

The more affordable Alberta and Quebec markets began recovering in early 2024. Sales in these provinces are expected to reach historically high levels, with prices growing faster than national averages during the first half of the forecast period.

Housing starts set to slow down

We expect housing starts to slow down over the forecast period, remaining above their 10-year average. The slowdown is primarily due to fewer condominium apartments being built. With low investor interest and more young families looking for family-friendly homes, developers will find it harder to sell enough units to fund new projects. The increase in unsold units will likely reduce new project launches, leading to a decline in new condominium apartment construction.  

Regional activity will vary:

• Ontario: Pre-construction condominium apartments, often bought by investors, will see lower demand due to weaker resale and rental markets. This will lead to new construction slowing down as of 2025.
• British Columbia: With fewer investors and stronger resale markets, the slowdown in condominium apartment construction will be milder and delayed.
• Alberta: Because more buyers are actual residents as opposed to investors, the impact on new construction will be minimal.

Rental apartment construction reached record levels in 2024 due to government support, a rapidly growing renter population and strong rent growth at the time of planning. We expect this momentum to continue through 2025 – 2026, supported by numerous projects set to start. However, softening rental market conditions may lead to fewer rental projects starting in 2027.

We expect a small recovery in ground-oriented home construction, led by lower-priced options. First-time buyers may prefer resale homes that offer better supply. Developers will be limited in their ability to compete with these resale markets due to high costs and lower profits. Regionally, new construction in Quebec will recover from recent lows. In Alberta, new construction will slow down from high levels.

Figure 2: Canada’s New Construction Slows but Maintains Historic Strength
Housing Starts by Dwelling Type

Source: CMHC
The forecasts included in this document are based on information available as of January 14, 2025.

Rental markets continue to rebalance

Since 2024, rental supply has grown faster than new demand but affordability remains a challenge. We expect lower immigration and an increase in first-time homebuyers to continue to reduce rental demand throughout 2025 – 2027. Supply will continue to expand as new rental units are completed, leading to higher vacancies and slower rent increases.

However, rental affordability will take more time to improve. Some vacated units will adjust to market rents and renters' incomes will catch up to previous market rent increases. Additionally, as financially able tenants move to higher-priced new units, more affordable options will gradually open up for other tenants (PDF).

Alternative scenarios

To address significant economic uncertainty, we present two alternative scenarios below in addition to the medium scenario presented above.

1. Low-growth Scenario

• The U.S. puts higher tariffs on Canadian exports, causing job losses and a recession in 2025.
• U.S. immigration policies become stricter, making Canada more attractive to immigrants, leading to higher immigration than expected.
• Higher tariffs temporarily raise inflation but the central bank lowers the policy rate to support the economy. Financial uncertainty increases mortgage borrowing costs slightly relative to the medium scenario.

Impact on housing:

• The recession delays housing recovery, increasing pent-up demand.
• Fewer homes are built due to weaker demand and supply challenges.
• By late 2026, the economy rebounds and a growing population boosts home sales.
• Rental markets stay tight, limiting improvements in rental affordability.

2. High-growth Scenario

• The U.S. introduces fewer and shorter-lasting tariffs, while U.S. government spending boosts Canadian exports.
• Canadian immigration meets recent targets.
• Higher incomes and stronger consumer confidence encourage more spending. Stronger declines in borrowing costs make homeownership more attainable.

Impact on housing:

• More homes are built thanks to better financing and business conditions.
• Stronger job and income growth combined with lower mortgage rates make homeownership more accessible.
• Higher demand pushes home prices up more quickly.

*Conventional 5-year fixed mortgage rate (average of rates posted by Canadian lending institutions).
The forecasts included in this document are based on information available as of January 14, 2025.
(F): Forecast scenarios for low, medium and high growth
Source: CMHC, CREA, Statistics Canada, Haver Analytics