Analyzing Canada’s Economic Outlook: Navigating Trade Tensions and Housing Market Adjustments

As we look ahead to the economic landscape of Canada in 2025 and beyond, several factors are poised to significantly impact the nation’s growth trajectory, particularly in light of evolving bilateral trade relationships and the housing market’s cyclical fluctuations. Central to this discussion is the backdrop of U.S.-Canada trade tariffs, anticipated recessionary pressures, and the ramifications for the housing sector.

Trade Tariffs and Economic Implications

According to our baseline scenario established on June 26, 2025, bilateral trade tariffs between the U.S. and Canada are expected to reach their peak in the latter half of the year. Following this peak, a gradual reduction in tariffs is anticipated, promoting a more favorable trade environment by the second half of 2026. U.S. tariffs imposed on other countries are predicted to follow a similar decline, contributing to a reduction in global demand, which is likely to adversely affect Canada’s economy throughout 2025.

This dip in global demand, exacerbated by a potential recession, suggests that Canada will experience slow economic growth in 2025. Despite these challenges, a recovery trajectory is anticipated to commence in early 2026, provided trade agreements can be effectively negotiated.

Factors Influencing Economic Slowdown

Three key factors are currently driving this economic slowdown and are likely to continue doing so in the near future:

1. Price Pressures: Rising costs for goods and services are placing a strain on household budgets, contributing to reduced consumer confidence and spending.

2. Lower Demand: Both domestic and international demand are showing signs of weakness, further hampering growth prospects.

3. Uncertainty: Heightened uncertainty surrounding trade policies and geopolitical events is leading to cautious behavior among businesses and consumers alike.

These factors are expected to lead to increased inflation, peaking at just above 3% by mid-2026, which will further impact consumer spending and overall economic health.

Labor Market and Investment Challenges

As firms grapple with the consequences of tariffs and diminishing demand, labor markets are likely to weaken. A reduction in labor demand will be felt across various sectors, while uncertainty surrounding future trade policies is likely to slow down much-needed investments. Supply chain disruptions, stemming from both trade policies and inflationary pressures, will drive costs up, creating a challenging environment for businesses.

For households, the combination of potential job losses and rising prices will continue to constrain consumption levels. Even with favorable borrowing conditions, many prospective homebuyers will hesitate to enter the market due to the prevailing economic uncertainties.

Housing Market Dynamics in 2025

The housing market has faced notable challenges since the beginning of 2025, with many buyers and developers adopting a “wait-and-see” approach due to slow economic growth and ongoing trade tensions.

Resale Market Softens

Resale markets have particularly softened in provinces like Ontario and British Columbia, while Alberta displays troubling signs of cooling. Contrastingly, Quebec’s housing activity has remained relatively stable, buoyed by more favorable buyer sentiment. The current housing forecast aligns closely with the low scenario outlined in the Housing Market Outlook, highlighting escalating risks ahead.

Home Price Trends

The average home price in Canada is projected to decline by approximately 2% throughout the year. Areas with significant price drops, such as Ontario and British Columbia, are experiencing reduced investor activity, especially in high-cost condominium markets. Recovery is expected in 2026 as economic fundamentals stabilize, though housing starts may respond slowly due to cautious developer behavior and tightening financing conditions.

Construction Patterns

Multi-unit construction is expected to remain strong compared to historical averages but will display regional variance. While construction activity in Atlantic Canada, the Prairies, and Quebec remains robust, Ontario and British Columbia are likely to experience sharp declines, driven by high costs and diminishing investor confidence. Many developers are facing challenges with unsold inventory and rising interest rates, leading to canceled or postponed projects.

Rental Market Dynamics

The rental landscape is gradually loosening as a surge in supply coincides with reduced demand. Although rental prices continue to rise, these increases are smaller than in previous years. Factors such as slower household formation, diminished immigration, and weaker labor markets are exerting downward pressure on rental demand.

Affordability remains a major hurdle for many homebuyers, particularly in high-cost markets. Despite recent modest cuts to policy rates, mortgage rates remain elevated, underscoring a persistent affordability crisis.

Conclusion: Stabilization on the Horizon

Canada’s housing market is undergoing a significant adjustment period characterized by reduced economic growth, geopolitical uncertainty, and lower population inflows. While these challenges pose immediate hurdles for the Canadian economy and housing sector in 2025, there is optimism for gradual stabilization in 2026. As trade tensions ease, mortgage rates stabilize, and confidence gradually returns, the housing market is expected to rebound towards a more balanced trajectory, affirming its essential role in Canada’s broader economic recovery.

With informed policies and strategic engagement in trade negotiations, Canada has the potential to emerge from this period of uncertainty on a path toward sustained growth and resilience.