TD Bank cuts outlook for Canada's housing market as borrowing costs climb

Toronto-Dominion Bank has downgraded its outlook for Canada’s housing market in 2026 and is calling for home sales to fall five per cent as higher bond yields take their toll.

“That’s very much the driving factor,” Rishi Sondhi, an economist at TD, said. “These higher yields … are likely already impacting Canada’s housing market, with sales declining for the first time in six months in August.”

Home sales fell 0.7 per cent In August from July, and the national benchmark price was flat month over month, the Canadian Real Estate Association (CREA) said earlier this month, adding that the higher cost of borrowing was weighing on the sector.

At the midpoint of this year, TD had called for home sales to fall three per cent in 2026. It also predicted flat prices for the year, which it still does.

TD doesn’t see any borrowing relief in the near term. It is now calling for the yield on the five-year bond — which is used to set fixed mortgage rates — to hit 3.6 per cent in the third quarter, compared with a forecast in June for a yield of around three per cent. It expects yields to fall in 2027 as the price of oil moderates.

TD’s forecast assumes the Bank of Canada continues to hold interest rates at 2.25 per cent through next year.

Sales into 2027 “are unlikely to recover this lost ground,” while price increases are expected to come in under two per cent and remain well below pre-pandemic levels, Sondhi said.

Pent-up demand and an improvement in the job markets will support “modest” increases in the market, he said, but TD has downgraded its jobs outlook due to the escalating trade war between Canada and the United States.

“In our view, that will hinder economic growth to an extent,” Sondhi said. “But the main driver of the downgrade is the upgrade in interest rates, borrowing costs.”

Robert Kavcic, a senior economist at BMO Capital Markets, said the housing market has remained balanced nationally, but people are still buying and selling fewer homes than was typical before the pandemic-era boom and there’s little on the horizon that would cause sales or prices to sharply rebound.

“Speculation is gone, investors are absent and prices are holding flat alongside low and stable volumes,” he said in an email to clients earlier this month.

Other economists are calling for prices to fall.

“While we had previously anticipated a stabilization this year, we now expect … house prices to fall a bit further in the coming months,” Ariane Curtis, North America economist at Capital Economics Ltd., said in a report after the CREA numbers came out.

Capital Economics also downgraded its 2027 outlook, calling for home prices to remain flat for 2027 instead of rising by one per cent.

Breaking real estate down by province, TD is calling for sales and prices in Ontario and Quebec to stabilize, though any gains will come in below one per cent due to weak population growth.

Sondhi said a rising savings rate in Quebec indicates households there are turning more cautious due to poor affordability and economic weakness.

In Alberta, a three per cent price increase is forecasted for this year and next year, but higher borrowing costs could cap gains despite higher oil prices.

“Strained affordability and economic softness” should hold back price growth in Manitoba, Sondhi said, while Saskatchewan is looking at price gains due to “decent affordability.”

In the East, a trio of factors — poor affordability, weak population growth and higher borrowing costs — in Nova Scotia, New Brunswick and Prince Edward Island will corral price gains to between one per cent and two per cent.

Newfoundland and Labrador could record price increases of three per cent in the fourth quarter of 2027 from the same period in 2026 due to a favourable affordability backdrop, giving it “one of the stronger performances of any province.”

Source: MSN Money / Financial Post