Canadian Housing Market Shows Signs of Recovery, But RBC Warns of Potential Setback in 2026
Improved Affordability and Expected Rate Cuts Fuel Near-Term Optimism, Yet Long-Term Sustainability Concerns Loom
A new report from RBC Economics suggests a much-anticipated recovery is beginning to take hold in the Canadian housing market, offering a glimmer of hope for buyers and sellers after a prolonged period of stagnation. However, this optimism is tempered by a stark warning: the recovery may be short-lived, with fresh price declines potentially arriving in 2026.
This forecast paints a picture of a market experiencing a “W-shaped” recovery rather than a steady “V-shaped” rebound, characterized by near-term gains followed by another period of correction.
The Case for the Horizon: Signs of Recovery in 2024/2025
RBC points to several factors driving the current positive momentum:
- Anticipated Interest Rate Cuts: The primary engine for recovery is the widespread expectation that the Bank of Canada will begin cutting its overnight rate in the latter half of 2024. This would gradually lower borrowing costs for mortgages, improving affordability and bringing sidelined buyers back into the market.
- Improved Affordability (Relative to the Peak): While still stretched, the sharp price corrections and income growth in some markets have made entry-points slightly more accessible than at the market’s peak in early 2022.
- Pent-Up Demand: Years of suppressed activity—from first-time buyers waiting on the sidelines to families delaying moves—are creating a pool of demand that is beginning to test the waters as confidence slowly returns.
This combination is expected to fuel increased sales activity and modest price growth through 2024 and into 2025.
The 2026 Warning: Why the Recovery Could Stumble
Despite the near-term sunshine, RBC’s analysis identifies significant headwinds that could cause the market to stumble again by 2026:
- The Affordability Cliff: Even with modest rate cuts, RBC warns that housing will remain “excruciatingly unaffordable” for a large segment of the population. The bank’s aggregate affordability measure is still near its worst level in decades. This fundamental barrier will eventually cap demand and price growth.
- Economic Pressures: A potential economic slowdown could impact household incomes and consumer confidence, making Canadians more cautious about making large financial commitments like a home purchase.
- Policy Uncertainty: Government policies aimed at increasing supply or cooling demand could introduce new variables that impact the market’s trajectory.
A “W-Shaped” Recovery Pattern
RBC’s projection suggests the market is not headed for a smooth, uninterrupted climb. Instead, they foresee a pattern where initial enthusiasm and rate-cut-driven activity push prices up, only for them to encounter a hard ceiling of affordability and economic reality, leading to a fresh round of price adjustments in 2026.
Regional Variations Will Be Key
The report emphasizes that this national forecast will play out differently across the country. Markets that experienced the most extreme volatility during the pandemic—such as those in Ontario and British Columbia—are likely to see the most pronounced “W” effect. More stable and affordable markets in the Prairies and Atlantic Canada may demonstrate greater resilience.
Advice for Market Participants
- For Buyers: The near-term environment may provide more selection and less frenetic competition than during the peak, but affordability will remain the primary challenge. Caution and financial prudence are advised.
- For Sellers: The window to list a property may become more favorable in the next 12-18 months as buyer activity picks up. However, pricing expectations must be realistic and grounded in the new market reality, not the peaks of 2022.
Conclusion: Cautious Optimism with a Reality Check
RBC’s message is one of cautious, tempered optimism. While the worst may be over for the current downturn, the idea of a smooth return to the boom years is unrealistic. The report serves as a reminder that the market’s fundamental affordability problems have not been solved and will continue to dictate its long-term health, likely resulting in a bumpy recovery path with potential setbacks on the horizon.