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Robert McLister: Here are some not-so-bold predictions for the real estate and mortgage markets for 2025
Published on January 3, 2025 • Last updated 8 hours ago • 3 minutes reading time
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Homes in Toronto, Ontario. Photo by James MacDonald/Bloomberg Files
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In many ways, Canada's mortgage outlook for 2025 is as clear as an octopus playing charades. Much depends on the unknown policies of new governments on both sides of the border, which could quickly reshuffle the deck for Canadian mortgage rates and real estate. We'll know more later this quarter, but for now there's enough clarity on certain points to make some not-so-bold predictions. Here are five predictions for mortgages and housing in 2025.
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1. OSFI's loan-to-income (LTI) rule will have teeth
Our banking regulator now limits the percentage of mortgages that can exceed 4.5 times the borrower's gross income. However, the limit varies depending on the lender and is confidential. This means that mortgage approvals from many government-regulated lenders are a godsend if your LTI ratio is above this level. This uncertainty will create annoying inefficiencies for some borrowers in 2025 as their applications are unexpectedly rejected and they are forced to apply to multiple lenders.
The LTI limits could become more of an eye-catcher if interest rates fall another 100 basis points or so. From this point onwards, the LTI will be more restrictive than the government's current mortgage stress test. In fact, it could limit excess debt so well that OSFI cancels the stress test by December.
2. Real estate is getting a spring boost
Real estate has several tailwinds in 2025: relaxed mortgage insurance rules, income growth, improving market sentiment, falling interest rates, regional supply constraints and pent-up demand. It's no wonder that professional crystal ball gazers often bet on house price increases of over four percent.
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Most incomes are now rising by more than four percent annually, governments are discouraging foreign and speculative purchases and population growth is being slowed. This recipe should prevent mortgage affordability from going further down the drain.
As for interest rates – the big puppet master of mortgage demand – they remain a big wild card for 2025. Because of this, you really aren't bold enough to predict a strong real estate market with confidence.
3. Debt means more homeowners have to travel longer distances
Although debt service ratios have fallen slightly, they are still close to a record high. And non-mortgage debt burdens – for example from credit cards (+9.4 percent) and car loans (+13.6 percent) – have risen sharply year-on-year. Add to this the rising prices of services, food, property taxes, insurance and many other expenses. As a result, many indebted consumers will need to find cheaper housing, and with work-from-home and hybrid work arrangements still playing a role, middle-class Canadians will increasingly look for new homes further from major city cores.
4. Volume increase when switching
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Countless Canadian mortgage lenders are expecting a payment shock when they renew their contracts this year, with most facing rates that are 200+ basis points higher than their previous contracts. To lower monthly payments, Canadians are comparing store mortgage rates more aggressively. Many with higher debt ratios will take advantage of new rules that allow borrowers to switch lenders without having to pass the federal mortgage stress test. Given this potential churn, lenders will increase their renewal rates to keep customers in-house. While this saves some borrowers the hassle of switching loans, with 1.2 million mortgages coming up for renewal – well above normal – expect plenty of mortgage musical chairs anyway.
5. Cross-sale will increase price competition
Deposit-taking lenders are increasingly willing to sacrifice up-front interest income (i.e. offer higher mortgage discounts) in the hope of cross-selling other financial products. I'm talking about products like savings accounts, credit cards, lines of credit, creditor life insurance, GICs, and other investments.
This regulation is a win for consumers as they do not have to buy these products even if they are bombarded with offers. The downside is that this trend will place competitive pressure on lenders who have no other financial services to sell (so-called “monoline” lenders).
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(As a side note, bundled pricing – where lenders offer a lower interest rate if you agree to other products – is not an illegal “tied sale,” although many mistakenly confuse this.)
Ultimately, the predictions above aren't all that far-fetched, but one thing is certain: 2025 will bring many surprises.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X below @RobMcLister.
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