The State of Canada’s Economy and Housing Market: Forecasting Through 2026

As we look ahead to the latter half of 2025, the economic landscape in Canada seems increasingly complex, especially regarding bilateral trade with the U.S. and the subsequent effects on employment, inflation, and the housing market. With projected peaks in trade tariffs and signs of a modest recession, understanding these dynamics is essential for policymakers and stakeholders alike.

Bilateral Trade and Economic Outlook

In our baseline scenario as of June 26, 2025, bilateral U.S.-Canada trade tariffs are expected to peak in the year’s second half. However, optimism is on the horizon as these tariffs are anticipated to gradually decline by the latter half of 2026, coinciding with potential new trade agreements. This shift not only promises to revitalize trade relations but also suggests a rebound in Canada’s economy following a likely modest recession in 2025. As global demand diminishes due to similar U.S. tariffs on other nations, Canada’s economic fabric will be tested.

Factors Contributing to Economic Slowdown

Three primary factors are currently contributing to Canada’s economic slowdown:

1. Price Pressures: As tariffs rise, prices for consumer goods and essential materials will increase, straining household budgets.

2. Lower Demand: Decreased demand both domestically and from international markets is stifling revenue, particularly in sectors reliant on exports.

3. Uncertainty: A pervasive sense of uncertainty among investors and consumers is slowing down investment and spending decisions.

Inflation is expected to rise, peaking just above 3% by mid-2026, which will further challenge both businesses and households. Additionally, a slight uptick in the unemployment rate forecasted for this fall underscores the fragility of the labor market.

Impacts on Labor Demand and Investment

For businesses affected directly or indirectly by tariffs, reduced international demand is likely to lead to lower labor demand. The uncertainty surrounding trade policies will further hinder investment opportunities, creating a ripple effect throughout the economy. Supply chain disruptions, exacerbated by trade uncertainties and escalating tariffs, will introduce additional cost burdens, ultimately driving prices higher.

These economic pressures will impact household spending, as rising prices and job insecurity will lead to decreased consumption. Notably, even with more favorable borrowing conditions, the housing market will not be insulated from these economic headwinds.

Housing Market Dynamics in 2025

As of early 2025, the housing market has exhibited signs of weakening. Many prospective homebuyers and developers are adopting a "wait-and-see" stance amid reduced economic growth and persistent trade tensions. While the resale markets in Ontario and British Columbia are particularly soft, Quebec has shown more resilience, bolstered by stable buyer sentiment.

The overall expectation is for a decline in the Canadian average home price by approximately 2% this year, with sharper cuts anticipated in Ontario and British Columbia, where high prices and diminished investor activity in the condominium sector continue to weigh on market dynamics.

Construction Challenges Ahead

While multi-unit construction remains historically elevated, regional variations are stark. Strong construction activity is expected in Atlantic Canada, the Prairies, and Quebec, but Ontario and British Columbia face declines. The rising costs of construction materials, along with the diminishing confidence of investors, pose significant hurdles for new builds, particularly in the condominium market. Indeed, many condo projects are being delayed or converted to rental accommodations, further complicating supply dynamics.

Simultaneously, the low-rise construction sector is facing similar challenges, although modest gains are anticipated in select regions like Quebec and Alberta.

Rental Market and Affordability Crisis

As the rental landscape evolves, it is expected to gradually ease, attributed to increased supply and diminished demand. A surge in rental and condominium completions is leading to slightly higher vacancy rates in major urban centers, causing rent increases to moderate compared to previous years. Factors like slower household formations, a decline in immigration, and weaker labor markets are contributing to downward pressure on rental demand.

Affordability continues to be a major barrier for prospective homebuyers, especially in high-cost markets. Even with anticipated cuts to the policy rate, mortgage rates are unlikely to provide much relief as they return to historical spreads above the Bank of Canada’s policy rate. Compounding these challenges are ongoing tariffs on construction materials, which keep costs elevated and constrain housing supply—resulting in a market environment where many buyers remain priced out.

Looking Forward: A Stabilizing Market in 2026

Canada’s housing market is currently navigating through a period of adjustment, characterized by weaker economic growth, reduced population inflows, and ongoing trade-related uncertainties. Yet, there is a silver lining: as trade tensions ease, mortgage rates moderate, and economic fundamentals gradually recover, we expect the housing market to stabilize more robustly in 2026.

This anticipated recovery should align the housing market trajectory with improved economic conditions, ushering in a more balanced and sustainable environment for both buyers and sellers in the coming years. Stakeholders must remain vigilant and adaptable to navigate the complexities posed by an ever-evolving economic landscape while fostering resilience within the housing market.

Understanding these intricate interactions between trade, economic conditions, and housing will be paramount for policymakers and stakeholders looking to mitigate risks and prepare for an uncertain yet hopeful future.