Canada’s New Mortgage Rules Will Drive Up Housing Prices
In December of 2024, the federal government softened its rules around mortgage lending. The idea behind the new policies is to make housing accessible to more homebuyers—and that’s what they’ll do, at least on paper.
The biggest changes affect buyers who have made down payments of less than 20 per cent, which require mortgage-default insurance. The government has lifted the maximum price cap permitted for these mortgages from $1 million to $1.5 million. Another change is that first-time homebuyers with insured mortgages, and anyone buying a newly built home with one, will be able to take up to 30 years to pay off their loans, instead of the previous maximum of 25. That means smaller monthly payments, but it also means buyers will pay more interest over the life of their mortgages.
You can hardly blame people for wanting to make that trade-off and take advantage of these updated rules, especially since a lot of new buyers will be people trying to escape Canada’s painful rental market. Apartment vacancy rates in many cities have hovered between one and two per cent for years, and severe supply shortages have pushed rents higher and higher, leading to historically expensive rents, even for mediocre units. If becoming a homeowner gets a bit easier, many people will jump at the opportunity—even if they have to stretch their finances to the limit.
But in the end these rules will backfire, flooding the housing market with more buyers and driving prices even further out of reach. This will be most noticeable in our most expensive housing markets: big cities like Toronto and Vancouver, as well as smaller communities with insufficient supply, like Victoria. In these markets, the new rules will jump-start demand for the same limited stock of homes. And it won’t just be renters trying to get on the housing ladder for the first time; we’ll also see existing homeowners, who wouldn’t previously have qualified for bigger mortgages, looking to upgrade their housing situation. That will especially increase demand for homes in the $1-million to $1.5-million range.
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Existing owners will benefit the most from these changes, as more people line up to buy their properties at inflated price points. The risks will largely fall on the new borrowers. Higher mortgage limits will encourage them to overstretch until they’re house-poor, and longer loan terms will leave them in debt longer. And they’ll be highly vulnerable to potential interest-rate increases in years to come.
In the short term, of course, the Bank of Canada will continue dropping interest rates through next year, which will also fuel demand as the borrowing costs of mortgages get cheaper. All in all, it’s a recipe for continued housing inflation, and at a particularly bad time. Canada’s GDP per capita has gone down for the past two years, and inflation has driven down real earnings—all of which has lowered the ability of many Canadian households to make mortgage payments.
There are some silver linings. The federal government has increased the borrowing limit to $2 million for homeowners who plan to refinance their home to build new secondary suites. That’s a good idea and might increase density. More accessible mortgages could also benefit some smaller markets, or those where favourable regulations and economic conditions have allowed enough new homes to be built to match demand. Calgary and Edmonton are two examples of cities that have built quickly, even as residents from more expensive areas flocked there.
But there are few places in Canada where new housing construction has kept up with existing demand, let alone where it can accommodate a new surge. The new rules don’t address the main housing need of our time: building a lot more of it in the first place. The government has made efforts on this front recently, like cutting the GST on new rental builds to stimulate construction. I’m a big fan of removing these obstacles to supply. We need more of that, not measures that will simply increase demand.
We shouldn’t expect a sudden and dramatic spike in home prices. The changes will be gradual—but inescapable. Unless a lot of new homes are built to offset the buyers drawn to the market by these new rules, prices will trend upward throughout 2025, as more people line up to buy property at increasingly elevated prices. A year from now, our most expensive cities will be worse off than they are today.
Andrey Pavlov is a professor of finance at the Beedie School of Business at Simon Fraser University.
