As of late July 2025, the Canadian housing market finds itself at a critical juncture, with many industry observers asserting that a fundamental change in perspective, rather than additional Bank of Canada (BoC) interest rate reductions, is essential for a sustained recovery. With few, if any, further BoC rate cuts anticipated this year, the market's trajectory increasingly depends on a psychological adjustment among participants.

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The Call for a Psychological Reset

For market activity to regain momentum, experts emphasize that both buyers and sellers must relinquish expectations of a return to the ultra-low interest rates seen in previous years. Instead, accepting current conditions as the prevailing norm is crucial. Tsur Somerville, a professor of real estate finance at the University of British Columbia, highlights this sentiment: "As long as they expect things to be better for them if they wait, they’re going to wait."

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Confidence and Economic Headwinds

Benjamin Tal, a prominent economist, identifies confidence, not merely interest rates, as the primary challenge facing the market. He points to profound economic uncertainty, stemming from factors such as subdued investment, decelerating consumer demand, and ongoing trade tensions. Tal suggests the Canadian economy is on the brink of a recession, noting, "We are basically very close to a recession. I suggest we are in a recession in Ontario already."

This prevailing lack of confidence continues to exert a chilling effect on the market, even as economists widely anticipate the Bank of Canada to maintain its policy rate steady this week. While some forecasts suggest potential rate adjustments later in the year, Tal cautions that this remains a "tough call," citing persistent core inflation and surprising employment data. Looking ahead to next year, he even posits, "you have to start thinking about the Bank of Canada hiking rates, not cutting rates."

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Diverse Reactions Among Buyers

The current market reality is eliciting varied responses from prospective homebuyers. For some, the stability offered by a steady central bank policy has provided sufficient assurance. In May and June of this year, certain vibrant areas of Toronto and Vancouver experienced an uptick in activity as buyers interpreted the Bank of Canada's consistent stance as a signal of certainty. Samantha Villiard, a regional vice-president with a leading real estate organization, observed, "Buyers are using that as, ‘That's the confidence I need.’"

However, for many others, the burden of affordability has become increasingly severe. Canadian mortgage broker Ron Butler notes that for middle-class families, the recent half-percent increase in fixed mortgage rates was particularly disheartening. Clients express that it's not solely the rising rates but a cumulative "crushing affordability context" that creates a deep sense of grievance.

Butler issues a stark warning: should fixed rates, currently in the "low to mid-fours," climb towards five percent, the impact could be "devastating," potentially "crushing everyone's dreams." For homeowners facing mortgage renewals, Butler's advice is urgent: "Go 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."

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Higher Rates: A Necessary Correction?

Despite the challenges, some experts argue that a period of elevated interest rates represents a vital market correction. Tal suggests that Canadians became "spoiled" by the historically low rates during the pandemic, which led to an overheated demand environment. He firmly believes that "higher rates, namely relative to what they were a few years ago, are here to stay." Tal views this as a "very healthy situation," asserting that "if there was something that was mispriced in the market for a long period of time, it was cash."

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Market Adjustments and Future Outlook

If interest rates hold steady, housing prices may not experience significant further declines, with the notable exception of the condominium sector. Tal describes the condo market as being in a "deep recession," with pre-sale activity "basically dead." Instead, affordability may gradually improve through rising wages. UBC's Somerville explains that "every homebuyer is willing to spend up to the maximum they can spend. So 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."

In Toronto, outside of the condo market, Villiard observes that both buyers and sellers are "coming to the table being reasonable." However, a sustained market rebound hinges significantly on broader macroeconomic clarity, particularly concerning international trade negotiations. Villiard states, "The catalyst? A decision on the trade negotiations. That is really what we're all waiting to see." Tal concurs, noting that the Bank of Canada is exercising caution until greater certainty emerges regarding tariffs, preferring to await more information before making further policy decisions.

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For more insights into the Canadian real estate market and expert perspectives, stay tuned to Coldwell Banker Horizon Realty.