Here are my Top 5 risks facing Toronto’s housing market in 2025.
New Condo Completions - Will There Be Issues on Closing?
Many condos set to be completed in 2025 will likely be worth significantly less than what buyers paid for them four or more years ago. At the time of purchase, buyers paid a 30–40% premium over existing resale units, anticipating continued price appreciation. However, condo prices have remained flat over the past four years, meaning these units will not hold the value buyers expected.
Typically, when a property’s value declines below its purchase price, buyers must increase their down payment to cover the shortfall. In 2024, many banks sidestepped this issue by using “blanket appraisals,” which assumed the unit was worth the original purchase price which I reported on last year. However, this approach will be harder to justify in 2025 as the typical decline in value becomes more pronounced.
Will more buyers default on their purchases? That’s likely.
Will we see new condo projects fail because too many buyers can’t close? That seems less probable.
These challenges will likely be resolved quietly. Our federal government, banking regulator, OSFI, and major banks will likely take steps to mitigate the fallout and prevent panic or distress in Toronto’s condo market.
Rental Market - A Lot of Supply, Less Demand
Many of the condos set to be completed in 2025 were purchased by investors, meaning a significant number will likely be listed for rent upon completion. While this is a common trend, the 2025 rental market is expected to be far more challenging.
By the end of 2024, the Toronto Regional Real Estate Board’s MLS system recorded a record number of properties listed for lease. The rental market is now contending with both elevated inventory levels and a likely cooling in demand. This reduced demand is primarily driven by the federal government’s decision to cut population growth targets, particularly the dramatic reduction in non-permanent residents.
In 2024, Canada’s population grew by 1.3 million people, but this growth is projected to slow in 2025 and 2026. As a result, the additional demand for rentals fueled by population growth will decline, putting continued downward pressure on rents.
A Challenging Year for Small Condos?
Last year was particularly challenging for anyone trying to sell a small condo in the Toronto area. These units, typically owned by investors, saw a surge in listings as many decided that 2024 was the right time to sell.
Flat condo prices, falling rents, and relatively high interest rates have made condos a less attractive investment option. With more investors exiting the market than entering, inventory levels have remained elevated.
This trend is likely to continue into 2025.
Economic Headwinds
Canada’s economy is facing several challenges, including the risk of tariffs with the United States. However, one of the key issues in the year ahead will be the imbalance between condo completions and new construction in the Toronto area. For every 10,000 units completed in 2025, builders are unlikely to start a similar number of new units. Housing starts will lag behind completions in 2025 due to the sharp decline in the new housing market.
This slowdown in the construction sector is likely to result in job losses in 2025, which could weigh on Canada’s economy.
I expect both the current and future federal governments to take measures to stimulate the construction of new housing in 2025, including offering significant tax incentives to builders to boost supply.
Interest Rates - Higher for Longer?
Both buyers and sellers are anticipating significantly lower interest rates in 2025. Buyers hope this will enable them to spend more on a home, while sellers hope it will drive home prices higher. However, I suspect there will be a considerable disconnect between expectations and reality when it comes to where rates actually land.
The Bank of Canada is likely to continue cutting interest rates in 2025, which will help lower the rates on variable mortgages. However, variable rates may only drop to around 4%, or into the high 3% range — far from the low rates many buyers are hoping for.
Five-year fixed rates are also expected to remain elevated this year. These rates are tied to the 5-year Government of Canada bond yield, which is strongly influenced by U.S. bond yields. The robust economy in the U.S. has kept bond yields high, and this trend will likely spill over into Canada. As a result, five-year fixed rates in the 4% range may be the lowest we see in 2025.
John Pasalis is President of Realosophy Realty. A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).
Have questions about your own moves in the Toronto area as a buyer, seller, investor or renter? Book a no-obligation consult with John and his team at a Realosophy here: https://www.movesmartly.com/meetjohn