According to the National Bank Housing Affordability Monitor, housing affordability improved for the sixth consecutive quarter in Q2 2025. House prices fell 2 per cent from the previous quarter, the benchmark 5-year mortgage rate dropped 8 basis points and median household income rose 0.8 per cent.
Seven of ten markets showed improvements, led by Vancouver, Toronto, Hamilton, Victoria, Ottawa-Gatineau, Montreal, and Winnipeg. Affordability remained unchanged in Calgary and deteriorated in Quebec City and Edmonton, where house price increases outpaced income growth during the second quarter.
Looking ahead, RBC projects that home resales will decline this year, largely due to a pullback in prices in Ontario and BC. At the national level, home prices are expected to decline in the latter half of the year and into 2026. RBC anticipates regional divergence, noting that “[b]alanced supply-demand conditions in the Prairies, Quebec, and parts of Atlantic Canada are expected to support modest price gains in 2025 and 2026. In contrast, Ontario and BC will continue to face challenges with imbalances in condo markets in Toronto and Vancouver likely spilling into other segments.”
Labour market slack is expected to decrease through 2026, contributing to a lower unemployment rate. Despite the tightening labour market, wage growth is likely to decelerate slightly over the coming year due to modest economic growth.
At the same time, affordability will be increasingly influenced by bond market trends, with bond rates representing a key challenge over the coming year. Fixed-term mortgage rates closely track government bond yields, which have begun to drift higher despite the possibility of further rate cuts by the Bank of Canada. The domestic bond market is becoming increasingly dominated by government debt. Based on the growing slate of federal government promises and provincial fiscal disclosures, the trend toward greater federal and provincial debt appears likely in the foreseeable future, potentially putting additional upward pressure on yields.
Recent bond buying at Government of Canada auctions has favoured the shorter end of the market, with strong activity at the 2-year and 5-year auctions. Coverage ratios have been strong, and the tail (the difference between the highest accepted yield and the yield in the when-issued (WI) market just before the auction concludes)[1] has remained tight.
Given the likelihood of increased federal borrowing, foreign demand for government bonds will be critical in keeping yields stable. Foreign holdings peaked above 40 per cent at the end of 2021 but have declined since. Without a rebound in foreign buying activity, bond spreads are likely to widen.
Non-residents and hedge funds have been particularly active in shorter-dated auctions. If their activity changes because of increased debt supply, any improvement to fixed mortgage rates could be limited, even with the possibility of lower overnight rates.
Overall, given these trends, we believe housing affordability is unlikely to improve much over the next six months. Price adjustments in Ontario and BC may support modest gains, but in our view, these improvements will be limited.
[1] Before a government bond auction, the securities trade in a “when-issued” (WI) market, where participants can gauge demand and establish a preliminary yield.
Independent Opinion
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