Mortgage broker Ron Butler says that for middle-class families, the half-a-percent rise in fixed mortgage rates in recent weeks was another deflating moment. (Photo by Artur Widak\/NurPhoto via Getty Images) \u00b7 NurPhoto via Getty Images <\/p>\n
With few \u2014 or no \u2014 further Bank of Canada (BoC) rate cuts expected this year, the country\u2019s housing market is facing a stark reality: a recovery hinges less on borrowing costs and more on a psychological reset.<\/p>\n
For activity to resume, experts say buyers and sellers must abandon hopes of a return to super-low rates and accept that current conditions are the new normal. \u201cAs long as they expect things to be better for them if they wait, they\u2019re going to wait,\u201d said Tsur Somerville, a professor of real estate finance at the University of British Columbia.<\/p>\n
Confidence is the main issue, not interest rates, says CIBC economist Benjamin Tal. He argues that the economic uncertainty is profound, driven by weak investment, slowing consumer demand and unresolved trade tensions<\/a>. \u201cWe are basically very close to a recession. I suggest we are in a recession in Ontario already,\u201d Tal said.<\/p>\n That lack of confidence is keeping the market in a deep freeze, even as economists widely expect the Bank of Canada to hold its policy rate steady on Wednesday. While CIBC is calling for two potential cuts later this year, Tal admits it\u2019s a \u201ctough call,\u201d with stubborn core inflation<\/a> and surprising employment data<\/a>. By next year, he says, \u201cyou have to start thinking about the Bank of Canada hiking rates, not cutting rates.\u201d<\/p>\n This reality is trickling down to buyers, but creating two very different reactions.<\/p>\n For some, stability is enough. In May and June, activity picked up in \u201chot pockets\u201d of Toronto and Vancouver as some buyers took the central bank\u2019s steady tone as a sign of certainty. \u201cBuyers are using that as, \u2018That’s the confidence I need,\u2019\u201d said Samantha Villiard, a regional vice-president at ReMax Canada.<\/p>\n For many others though, the pressure has long been nearly unbearable. Ron Butler, a mortgage broker at Butler Mortgage, says that for middle-class families, the half-a-percent rise in fixed mortgage rates in recent weeks was another deflating moment. Clients tell him: “It’s not just this increasing rate. It’s everything,\u201d he said. \u201cIt’s just an endless kind of crushing affordability context that, you know, you can tell from the sound of their voice that this is like a grievance against them.”<\/p>\n I believe that higher rates, namely relative to what they were a few years ago, are here to stay.Benjamin Tal, economist, CIBC<\/p>\n Should fixed rates, which have moved into the “low to mid-fours,” start heading back towards five per cent, Butler warns the effect would be devastating. \u201cIt will literally crush everyone’s dreams.\u201d<\/p>\n Story Continues <\/p>\n For those with mortgages renewing, Butler\u2019s advice is urgent. \u201cGo back to every email, every touch point you’ve ever had from your bank and see if they did offer you a rate that started with a three … You have to make absolutely sure you might have access to those low rates.\u201d<\/p>\n Still, some experts argue that an era of higher rates is a necessary correction. Tal says Canadians were \u201cspoiled\u201d by historically low rates during the pandemic, which overheated demand. \u201cI believe that higher rates, namely relative to what they were a few years ago, are here to stay,\u201d he said. \u201cAnd that’s actually a very healthy situation, because if there was something that was mispriced in the market for a long period of time, it was cash.\u201d<\/p>\n If rates hold steady, housing prices might not fall much further \u2014 except in the condo segment<\/a>, which Tal describes as being in a \u201cdeep recession\u201d where pre-sale activity is \u201cbasically dead.” Instead, affordability might improve gradually, led by rising wages.<\/p>\n \u201cEvery homebuyer is willing to spend up to the maximum they can spend,\u201d said UBC’s Somerville. \u201cSo if interest rates stay at this level, then prices will adjust relative to incomes in such a way over time to make housing plausible… The most likely way is prices stay flat while incomes catch up.\u201d<\/p>\n Villiard says Toronto’s stirring market (outside of condos) has both buyers and sellers \u201ccoming to the table being reasonable,\u201d but a sustained rebound likely depends on macroeconomic clarity \u2014 especially on the trade front.<\/p>\n \u201cThe catalyst? A decision on the trade negotiations. That is really what we’re all waiting to see,\u201d she said.<\/p>\n Tal agrees, noting that the Bank of Canada is playing it safe until there\u2019s more certainty on tariffs.<\/p>\n \u201cThey don’t want to take any chances with Trump,\u201d he said. \u201cThey need more information to make a decision.\u201d<\/p>\n John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf<\/a>.<\/p>\n Download the Yahoo Finance app, available for Apple<\/a> and Android<\/a>.<\/p>\n