Real Estate Outlook 2025

The Year of Growing Modestly

It was another year of delayed recovery for REALTORS® across the Lower Mainland as prospective buyers continued to shuffle around the sidelines but largely stayed out of the market. Even as record levels of population inflows, and pent-up demand continued to support higher sales potential, dismal affordability from early pandemic-era price growth and still restrictive mortgage rates restrained buyers across the region. There is a sense of optimism for 2025 as rapid Bank of Canada policy interest rate cuts and mortgage policy open up financing options for more buyers, but economic risks from U.S. trade policy and a federal government policy U-turn on population growth are headwinds to a stronger rebound.

Prices hold, sales dip

MLS® data highlights the weakness. Lower Mainland sales, covering Metro Vancouver, the Fraser Valley and the Sea-to-Sky region stalled in 2024, following an 8 per cent decline in 2023 and 38 per cent in 2022. Fraser Valley Real Estate Board sales fell about two per cent in 2024. While unfair to compare to the pandemic spike in 2021, panning out, at roughly 40,000 units, this is not far from the cyclical lows of the past two decades even as population has ballooned.

Average annual prices were roughly unchanged in 2024, up one per cent from 2023 to $1.2 million. FVREB’s average price rose 1.7 per cent to $1.03 million. However, at its peak of $1.26 million, the average priced home sold in the Fraser Valley Real Estate Board area was 68 per cent above pre-pandemic 2020 before retreating with a spike in interest rates. Despite an ebb and flow, prices have remained exceptionally high and along with higher interest rates kept buyers out of the market, or increasingly shifting to more affordable pastures, east of the Rockies.

Undoubtedly, it has been a sobering couple of years for those in the residential real estate business, grappling with peaks and valleys of demand from interest rate swings. That said, there is room for optimism. Sales perked up in the final quarter of 2024, as lower interest rates stirred the market. As we have long noted, pent up demand has only increased in recent years with robust population growth and constrained financing. Declining mortgage liabilities among younger households over the past two years was a reflection not of prudence and debt conservatism, but of access to mortgage financing which is being relaxed.

Rate, financing policies to boost demand

Lower rates have historically been a panacea for market weakness, triggering rebounds in interest rate sensitive sectors like housing. The Bank of Canada has aggressively reduced rates since mid-year from 5.0 per cent to 3.25 per cent by year end in response to normalized inflation, a weak economy, and labour market slack which has already pushed some buyers off the fence. We expect the Bank to cut to 2.5 per cent in the first half of 2025. This will cut variable rates and shorter 1-year rates. However, those looking for downside for 3- and 5- year fixed rates may be disappointed. Firm U.S. economic and inflation patterns, and inflationary tariff risks are limiting U.S. Fed rate cuts and treasury yields. Canadian bond yields take their cue from the latter suggesting persistently elevated mortgage rates when compared to the pre-pandemic era and challenging affordability.

Still, several policy measures open up financing options particularly relevant for higher priced markets like those in Metro Vancouver and the Fraser Valley. Specifically, the increase in the price cap from $1.0 to $1.5 million to access mortgage insurance, and 30-year amortization mortgage for all first-time home buyers will drive middle- market purchases and for multi- family properties. This is especially beneficial for Fraser Valley markets where there remains some semblance of affordability, and buyers get more home for their dollar.

Forewarned is Fore-armed

Although rates are in decline, the real estate and development sector should remain wary of the many potential risks that could impact the housing market.

Of the known headwinds, Canada is in for a period of low population growth as the federal government completes its U-turn in policy. The federal government plans deep reductions and net outflows of temporary residents and fewer permanent residents following massive gains in recent years. With the highest temporary resident share of population in Canada, B.C. and the Lower Mainland is at higher risk. Our view remains that BC will eke out positive growth in population, but slowing patterns will be evident in the rental market driving higher vacancy rates and slower rent growth. This adds to a plethora of policies curbing demand for investment properties, including short-term rental restrictions, higher capital gains inclusion rates, and elevated mortgage rates. Homeownership markets are less affected given strong gains in permanent resident inflows from previous years.

The economy naturally is a downside risk. BC has avoided a recession but is coming off a weak year in which we estimate a 1.5 per cent growth rate aided largely by rapid population growth and public- sector expansion. More telling is that per capita GDP has declined for more than a year, signaling worsening economic wellbeing. BC’s and the local unemployment rate is lower than the national rate, the job market does remain oversaturated with workers. Rate cuts are forecast to boost consumption and investment in 2025, while exports rise as northern mega projects complete, pointing to 2.5 per cent growth in 2025. However, there are plenty of uncertainties with the potential for severe U.S. trade tariffs, which, contingent on severity, could plunge Canada into a recession and trigger widespread job loss. BC would face similar headwinds but would be cushioned in part by greater diversity amongst trading partners and resource-based exports to the U.S. Severe tariffs would push the Bank of Canada’s policy rate even lower.

Broadly, our view remains that the housing market will pick up modestly in 2025 by 10 per cent and price growth of up to five per cent due largely to lower interest rates and pent-up demand despite significant headwinds. Inventory, while elevated, is not excessive and will decline as sales rise. There remains a severe undersupply of housing in the market that has only swelled in recent years, and our view remains that weak current market conditions will reduce new home construction over the next two years, leading to upward price pressure.