Viet Do

• Canada has not been immune to the recent rise in global bond yields, which reflects a more challenging backdrop for fiscal and monetary policy. These higher yields (which underpin fixed mortgage rates) are likely already impacting Canada’s housing market, with sales declining for the first time in six months in August.
• With the forces behind the climb in rates set to linger, we’ve upgraded our forecast for bond yields through next year, relative to our prior forecast in June. This upgrade comes even under our baseline assumption that the Bank of Canada remains on hold through 2027 amid near-target underlying inflation and an expected gradual easing in crude oil prices.
• Accordingly, our near-term forecasts for growth in Canadian home sales and average home prices have been downgraded. Canadian home sales are tracking a decline of about 5% this year and are unlikely to recover this lost ground in 2027. Although we still see roughly flat Canadian average home price growth this year, next year prices will likely expand at a sub-2% pace.
• While housing is likely to remain subdued in 2027, our projections envision positive (albeit modest) quarterly growth in both Canadian home sales and average prices. Even so, home sales are likely to remain well below pre-pandemic levels through next year. Anticipated quarterly gains are likely to be supported by the further release of pent-up demand. Job markets are also forecast to improve gradually, although the outlook has been downgraded relative to our prior projection due to the recent escalation in the Canada-U.S. trade conflict. Perhaps most crucially, this forecast depends on some downdrift in Canadian bond yields beginning in the fourth quarter and lasting through next year.

Highlights

• Canada’s supply gap is broadly unchanged from last year. Relative to our 2025 estimate, the supply gaps narrowed in Toronto and Calgary and remained unchanged in Vancouver. However, the supply gaps have widened in Ottawa and Montréal.
• Construction is expected to slow faster than demand, leaving Canada short of the roughly 417,000 to 469,000 homes needed each year to restore pre-pandemic affordability by 2036.
• Not building enough during the current housing downturn is a key risk. Near-term affordability improvements since 2023 may be difficult to sustain if housing construction does not keep pace with future demand. Although rental market conditions have eased, ownership supply is facing significant challenges.

Canada's housing market is entering a new phase. We see slower population growth, more balanced rental markets, improving affordability and elevated housing completions in many cities. However, the key risk is that Canada does not build enough during today’s market softening and falls short of housing when demand strengthens again. That would leave Canada significantly behind the 417,000 to 469,000 homes needed each year to restore pre-pandemic affordability by 2036.

• Consistent with our national forecast, we’ve embedded upgrades to 2026 real GDP growth across most provinces. That said, the drivers of these boosts vary, with a solid Q2 boosting Ontario, oil production lifting regions like Alberta, and investment supporting B.C. 
• Regional growth divergences are set to widen into 2027 as tariffs, export bans, and higher energy prices create a clear divide between commodity-producing and manufacturing-oriented provinces. Alberta, Saskatchewan, and Newfoundland & Labrador are benefiting from stronger oil prices through higher incomes, profits, and government revenues. In addition, they’re relatively insulated from trade disruptions thanks to commodity exemptions and more diversified export markets. In contrast, Ontario, Quebec, Nova Scotia, and New Brunswick face a double headwind from disproportionate tariff exposure and higher energy costs, with few offsetting benefits from the commodity price upswing.
• Federal and provincial governments have rolled out new waves of support in response to escalated trade frictions, including loan programs, wage subsidies, grants and EI enhancements. These measures should provide some offset to new external shocks.
• Recent better-than-expected employment gains have pushed unemployment rates lower across most provinces, though softer hiring next year is expected to slow further improvement. At the same time, sharply weaker population growth – including outright declines in Ontario, Quebec, B.C., Manitoba, and Newfoundland & Labrador – will restrain both labour force gains and upward pressure on jobless rates.
• Renewed conflict in the Middle East has pushed WTI oil back to the $100/bbl mark and reinforced a source of uncertainty for the economic outlook. Alberta, Saskatchewan, and Newfoundland & Labrador are benefiting through sizable revenue windfalls, energy-sector incomes and profits. Elsewhere, higher prices are a net drag.
• The combination of rising yields and downgraded economic activity underpins broad-based downgrades to growth in home sales and average home prices. On the latter, B.C. and Ontario are an exception, where compositional forces (i.e. stronger sales growth in more expensive properties) are supporting average prices. This trend is likely to persist in the near term.