Today’s release of February housing data by the Canadian Real Estate Association (CREA) showed the housing market slowed further at the start of the month, reflecting the lingering effect of January’s snowstorm. Activity picked up in the second half of the month, a positive harbinger of a spring rebound.
The number of home sales recorded over Canadian MLS® Systems fell 1.3% on a month-over-month basis in February 2026, following a 5.8% decline in January.
“February saw a continuation of the quieter levels of activity recorded in January, although there was some indication things were starting to pick up speed toward the end of the month,” said Shaun Cathcart, CREA’s Senior Economist. “2026 is still ultimately expected to be a story about pent-up first-time buyer demand finally seeing a chance to enter the market. They’ve had to wait a long time for mortgage rates to find a bottom, but some will no doubt continue to hold off for a bottom in prices in some Ontario and British Columbia markets.”
New Listings
New listings fell back by 3.9% on a month-over-month basis in February 2026, erasing the jump recorded in January.
With new supply down by more than sales in February, the national sales-to-new listings ratio tightened to 47.6% compared to 46.4% in January. The long-term average for the national sales-to-new listings ratio is 54.8%, with readings roughly between 45% and 65% generally consistent with balanced housing market conditions.
“Housing market activity in February remained slow, particularly in the stretch of Ontario between Windsor and Toronto,” said Valérie Paquin, CREA Chair. “That said, the main event never really gets going until around April, so there’s still time to get ready to buy or sell this year.”
There were 151,850 properties listed for sale across all Canadian MLS® Systems at the end of February 2026, up 3.7% from a year earlier but 12.3% below the long-term average for that time of year.
There were five months of inventory on a national basis at the end of February 2026, unchanged from January and right in line with the long-term average for the measure. However, the national average masks wide regional differences, with no province currently at that level and only a handful of local markets close to it. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months, and a buyer’s market would be above 6.4 months.
Home Prices
The National Composite MLS® Home Price Index (HPI) edged down 0.6% on a month-over-month basis in February, not a small decline but smaller than in January.
The non-seasonally adjusted National Composite MLS® HPI was down 4.8% compared to February 2025.
Bottom Line
The chart below shows that, just as Canada had a record housing rally during the pandemic, it is leading the housing correction. Canadian home prices are down 18% from their peak in the first quarter of 2022, when the Bank of Canada took the overnight rate down to a mere 25 bps. Currently, the policy rate is 2.25%, down from 5.0% at the peak of the tightening cycle. Back then, ultralow interest rates drove home prices to surge, particularly in smaller cities where remote workers fled to take advantage of a lower cost of living.
There is considerable pent-up demand among potential first-time buyers who will likely dip their toes in the market once winter passes. This year, we also see a record volume of refis and renewals, which will increase monthly mortgage payments and dampen household purchasing power. Affordability remains a challenge for first-time buyers, but mortgage rates and prices are considerably lower than a year ago. A reawakening of housing activity is likely as the spring market approaches, even with the war in Iran.
To be sure, the recent oil price shock has boosted market-driven interest rates as inflation fear mounts. Yesterday’s release of the CPI data shows that Canada’s inflation rate fell sharply before the war began. How much further inflation might rise will depend on the length of the war and the subsequent time it will take to reopen the Strait of Hormuz.
Written by
Dr. Sherry Cooper Chief Economist, Dominion Lending Centres
Canadian Inflation Falls More Than Expected to 1.8% in February
Canada’s inflation rate slowed by more than expected last month, before the oil shock of the Iran war. The yearly inflation rate fell to 1.8% in February from 2.3% in January, Statistics Canada reported on Monday.
Justin Trudeau introduced a temporary GST/HST break on a range of goods in January 2025, which expired in mid-Feb 2025. This raised the price level in February 2025, reducing inflation in today’s CPI reading. While the tax holiday initially drove annual headline inflation higher due to base effects, it’s now reversing and causing a deceleration that will likely be reflected in the March inflation data as well. This is very good news for the markets, particularly if the war with Iran comes to a relatively short conclusion.
Core inflation measures also eased by more than expected in February. The consumer price index excluding food and energy rose 2%, while the central bank’s trimmed and median measures of inflation both fell to 2.3%.
Shelter prices continued to decelerate last month, and were up just 1.5% from a year ago, the slowest pace in five years amid weak housing resales and smaller rent price increases.
Prices for food — a major sore spot for Canadian consumers — also rose at a slower rate. Yearly inflation for food purchased from stores was 4.1% in February, down from 4.8% the previous month. The deceleration was led by weaker price growth for frozen or fresh beef.
Still, grocery prices are up a cumulative 30.1% over the past five years.
Meanwhile, a more modest year-over-year deceleration in gasoline prices last month helped moderate the slowdown in headline inflation, with prices at the pump down 14.2% from 16.7% in January.
Gasoline prices were up 3.6% on a monthly basis, largely driven by higher oil prices ahead of the Middle East conflict and supply disruptions in some producer countries, Statcan said. Higher oil prices from the conflict in Iran are likely to show up in next month’s CPI data.
Bottom Line
It is very good news that the inflation backdrop softened last month, before the onslaught of the Iran war and the oil price shock. Some of the weaker base effects will be evident in the March CPI data as well, mitigating the impact of soaring energy and commodity prices on next month’s headline inflation number.
The Bank of Canada and the U.S. Federal Reserve will remain on the sidelines on Wednesday as a relatively quick end to the Iran war would keep a lid on inflation. President Trump has asked NATO countries to send warships to the Middle East to help open the Strait of Hormuz. The sooner the war ends, the sooner the oil price shock will dissipate. Given the uncertainty, the central banks will do best to keep their powder dry this time around, particularly given that labour markets in both countries have weakened substantially.
Written by
Dr. Sherry Cooper Chief Economist, Dominion Lending Centres
The Canadian Jobs Report Was Much Weaker Than Expected In February
Today’s Labour Force Survey showed considerable weakness last month, even before the Gulf War took hold of the global economy. Employment fell by 83,400 jobs after edging down in January (-25,000; -0.1%). This is the largest decline in employment in more than four years. On a year-over-year basis, employment was little changed in February 2026.
In February, the employment rate—the proportion of the population aged 15 and older who are employed—fell by 0.2 percentage points to 60.6%, marking the second consecutive monthly decline. The employment rate in February was just above the recent low of 60.5% observed in August 2025 and was down 0.4 percentage points year over year.
The number of people working full-time declined by 108,000 (-0.6%), offsetting growth recorded over the previous two months. At the same time, there was little variation in the number of people working part-time in February.
The number of employees in the private sector fell by 73,000 (-0.5%) in February, the second consecutive monthly decline. These declines offset gains observed in October and November 2025. Compared with 12 months earlier, the number of private sector employees was virtually unchanged in February.
The number of public sector employees and the number of self-employed workers were both little changed last month.
The unemployment rate rose 0.2 percentage points to 6.7% in February, as employment fell and more people searched for work. The unemployment rate was virtually unchanged from 12 months earlier (6.6%) and remained below the recent high of 7.1% reached in August and September 2025.
The participation rate—the proportion of the population aged 15 and older who were employed or looking for work—fell by 0.1 percentage points to 64.9% in February. It was down 0.4 percentage points year over year.
The employment decline in February was spread across services-producing industries (-56,000; -0.3%) and goods-producing industries (-28,000; -0.7%).
In services-producing industries, the largest decline was in wholesale and retail trade (-18,000; -0.6%). Employment in this industry has trended down since October 2025, with a cumulative decline of 52,000 (-1.7%) over this period.
In goods-producing industries, employment edged down in February in construction (-12,000; -0.7%) and manufacturing (-9,200; -0.5%). On a year-over-year basis, employment was little changed in construction, while it was down by 52,000 (-2.8%) in manufacturing.
Bottom Line
Today’s employment report is stale news as the war in Iran, which began on February 28 with coordinated strikes by the US and Israel targeting Iranian nuclear and military infrastructure, has had profound effects on the global economy. Owing to the closure of the Straits of Hormuz, oil flows are down by roughly 20 million barrels. Even with the largest release ever from strategic petroleum reserves, oil prices remain near $100 a barrel, a dramatic uptick from just two weeks ago.
Ordinarily, such economic weakness would trigger central bank easing, but the surge in energy prices will add to inflation, at least temporarily. Labour markets remain soft as the economy bears the weight of US tariffs and an upcoming CUSMA review looms over business. This is likely to complicate the Bank of Canada’s future monetary policy path. While the Bank might otherwise consider a rate cut to return growth and labour markets to healthier levels, the surge in oil prices is inflationary.
The Bank of Canada’s sole mandate is to return inflation to its 2% target, while the Fed’s mandate is to control inflation while maximizing noninflationary growth. The energy shock, if persistent, could justify a rate hike.
The BoC meets again next Wednesday, March 18, and markets and economists expect officials to hold the policy rate steady at 2.25%. The February CPI report for Canada will be released on Monday, but the February data are now ancient history, given the war. Meanwhile, hourly wages for full-time permanent employees rose 4.2% from a year ago, compared with 3.3% in January. Economists surveyed were expecting a 3.2% increase.
Much depends upon how long the war will last. According to today’s Wall St. Journal, oil markets are “waking up to a new reality: Disruption to the Gulf’s prodigious energy supplies isn’t ending anytime soon.” Many analysts aver that crude could hit new multiyear highs if the conflict drags on.
“Goldman Sachs this week raised its oil price forecasts, citing longer-than-expected disruption. Brent crude could average $145 in March and April in a more extreme scenario, it said. The bank now expects disruption to flows through the strait to last 21 days, up from its previous forecast of 10 days. Macquarie Group is now predicting that crude prices could top $150 if the strait remains closed for a few weeks. Others say oil prices could go even higher.”
“One reason for the changing outlook is a surge in attacks on tankers near the strait. Over the past 24 hours, at least seven vessels were hit in waters off the coast of Dubai and Iraq. One of the ships, a foreign tanker carrying Iraqi fuel oil, was ablaze in Iraqi waters. US officials said that Iran has also started to litter the strait with sea mines that could give the country outsized power to wreak havoc with the global economy.
“The war in the Middle East is creating the largest supply disruption in the history of the global oil market,” the International Energy Agency said Thursday as it slashed its forecast for oil-supply growth this year.
Written by
Dr. Sherry Cooper Chief Economist, Dominion Lending Centres
The Canadian Economy Shrinks by 0.6% in Q4, Owing to a Decline in Business Inventories
Statistics Canada reported this morning that the Canadian economy contracted by 0.6% at a seasonally adjusted annual rate, a significant reversal from the 2.4% expansion posted in Q3. The weaker growth rate reflected a steep decline in business inventories, which was partially offset by increases in household spending, exports, and government capital spending.
Economists surveyed by Bloomberg were expecting a 0.2% annualized decline over the last three months of 2025, while the Bank of Canada projected flat growth.
As US tariffs weighed on Canadian exports for much of the year, real GDP increased by 1.7% in 2025, marking the slowest annual growth since the economy contracted in 2020 owing to the COVID pandemic. Lower exports, particularly to the United States, were the main contributor to the slower rise in GDP in 2025.
A preliminary estimate suggests real GDP remained unchanged in January, after increasing by 0.2% in December, slightly stronger than economists’ estimate of 0.1%.
Exports rose 1.5% in the fourth quarter, after increasing 0.9% in the third quarter. The growth in the fourth quarter was led by higher exports of unwrought gold and of unwrought aluminum and aluminum alloys. Despite the increases in the latter half of the year, exports fell 1.7% in 2025, as shipments to the United States did not fully recover following the drop in the second quarter.
Imports edged up 0.3% in the fourth quarter, as higher imports of computers, clothing and footwear, and metal ores were largely offset by lower imports of pharmaceutical and medicinal products. For the year, imports were down 0.4% in 2025, driven by the 2.9% decline in the third quarter.
The better-than-expected Q3 gain will not be sustained in Q4, as Statistics Canada’s advance estimate for October showed industrial gross domestic product fell at a -0.3% monthly pace.
The current overnight policy rate of 2.25% remains stimulative, but until the likely outcome of trade negotiations with the US is resolved, Canada’s economy will be on shaky ground. It is unclear whether the Canada-US-Mexico free trade agreement will be extended beyond this year. If not, Canada will be in for a significant trade policy redo as it seeks replacement markets for its exports.
Household spending rose 0.4% in the fourth quarter after declining 0.2% in the third quarter. Higher expenditures on rent and financial services in the fourth quarter were partially offset by lower spending on new passenger vehicles and alcoholic beverages, as overall expenditures on goods declined for a second consecutive quarter.
On an annual basis, household final consumption expenditure was up 2.3% in 2025, keeping pace with the 2.2% growth in each of the previous two years. The rise in 2025 was led by increased household spending on financial services and rent.
Total capital investment rose 0.8% in the fourth quarter, driven by increased government investment in weapons systems. In contrast, business capital investment edged down 0.1% in the fourth quarter, as both residential and non-residential investment decreased. These declines were moderated by increased business investment in machinery and equipment, primarily computers (+19.6%) and intellectual property products, namely software (+0.7%).
Annually, total capital investment increased 1.4% in 2025, led by higher government investment in weapons systems (+45.9%) and engineering structures (+6.7%). Business investment rose 0.3% in 2025, as higher residential construction (+1.0%) and non-residential construction (+1.6%) were largely offset by weaker investment in machinery and equipment (-3.5%). The year 2025 was the third consecutive year in which government capital investment contributed more to GDP growth than business capital expenditures.
Business residential investment declined in the fourth quarter, led by decreased ownership transfer costs (-2.4%), a measure of resale market activity, and lower renovations (-1.3%). New construction (-0.5%) also declined in the fourth quarter due to lower work put in place for single- and apartment units.
Higher business residential investment in 2025 represented the first annual increase since 2021, as increased new construction (+1.0%) and renovations (+2.7%) more than offset the decline in ownership transfer costs (-3.4%).
Bottom Line
While weaker-than-expected Q4 GDP figures might normally trigger an easing move by the Bank of Canada, the Governing Council has made it very clear that it remains concerned about inflation. Tariff uncertainty is especially high now that the Supreme Court has found the Trump administration misused the International Emergency Economic Powers Act (IEEPA) to impose sweeping, open-ended tariffs — striking down the legal foundation for a central pillar of the administration’s trade strategy.
The decision removes the fastest way to impose broad country-level duties, but it does not end the tariff debate. Other statutory authorities remain in play, and businesses and trading partners are left to assess what comes next.
The ruling also lands amid sustained political pressure around affordability, which may shape how aggressively trade tools are redeployed. Even if tariff rates decline, businesses must now assess whether alternative authorities will be used to reimpose them. For the real economy, restoring stability may matter as much as reducing tariffs themselves.
Written by
Dr. Sherry Cooper Chief Economist, Dominion Lending Centres
CPI Inflation in Canada Fell A Tick to 2.3% Y/Y in January on Gasoline Price Decline
The Consumer Price Index (CPI) rose 2.3% on a year-over-year basis in January, following a 2.4% increase in December.
The gasoline price index was the largest contributor to the deceleration in headline inflation, with a larger decline in January than in December. Excluding gasoline, the CPI rose 3.0% in January, matching the December increase.
Indexes with year-over-year movements impacted by the temporary GST/HST break in January 2025 continued to put upward pressure on the year-over-year all-items increase in January 2026. Among the affected indexes, the CPI remained most affected by the acceleration in prices for restaurant meals, and to a lesser extent, by prices for alcoholic beverages, toys, and children’s clothing.
The core inflation measures decelerated further in January, with the BoC’s two favourite measures easing to their lowest levels in a year (see chart below).
Prices at the pump fell 16.7% year over year in January, after a 13.8% drop in December. The larger year-over-year decline was mainly due to a base-year effect. The index rose 0.5% month over month in January 2026, compared with a 4.0% increase in January 2025, when crude oil prices rose. Additionally, the partial reintroduction of the provincial gas tax in Manitoba in January 2025 is no longer impacting the 12-month movement.
For food purchased from restaurants, prices were higher in January 2026 (+12.3%) than in January 2025, when prices were lower due to the GST/HST break.
Similarly, prices rose on a year-over-year basis for other previously tax-exempt goods in January 2026, including alcoholic beverages purchased from stores (+7.9%), alcoholic beverages served in licensed establishments (+9.0%), toys, games (excluding video games) and hobby supplies (+8.7%) and children’s clothing (+6.3%).
Year over year, prices for cellular services decelerated in January (+4.9%) compared with December (+14.6%), reflecting a base-year effect after six consecutive months of upward pressure. On a month-over-month basis, prices declined in January 2026 (-0.8%) after increasing in January 2025 (+8.3%).
Prices for food purchased from stores rose 4.8% year over year in January, following a 5.0% increase in December. The slower price growth was mainly driven by a decline in fresh fruit prices (-3.1%) in January, after a 4.5% increase in December. Amid generally strong or stable harvests in producer regions, the largest contributors to downward pressure on prices were berries, oranges and melons.
Since early 2024, growth in shelter costs has slowed year over year. In January 2026, prices continued to decelerate, rising 1.7%. This is the first time in nearly five years that year-over-year shelter price growth has fallen below 2.0%. Slower growth in rents and mortgage interest costs drove the deceleration.
Rent prices rose at a slower pace year over year in January (+4.3%) than in December (+4.9%). Rent prices decelerated the most in Prince Edward Island (+0.2%) and Saskatchewan (+1.8%).
The mortgage interest cost index rose 1.2% year over year in January, following a 1.7% increase in December. This index has been decelerating since September 2023.
In January, prices rose at a slower pace in nine provinces than in December. Year-over-year price growth accelerated in British Columbia due to a base-year effect, as hotel prices declined on a monthly basis in January 2025 after increasing in December 2024, coinciding with a series of high-profile concerts in Vancouver.
Bottom Line
Although inflation pressures are dissipating, this report alone will not trigger a Bank of Canada rate cut when the Bank meets again on March 18. It is unlikely to move the Bank of Canada from the sidelines as it continues to evaluate how US tariffs are affecting the economy. The data suggest that Americans are paying the bulk of the tariffs.
The Bank of Canada’s preferred measures of core inflation decelerated, with the median gauge edging down to 2.5% from 2.6%, and trim falling to 2.4% from 2.7%.
What the Canadian economy needs is greater clarity on the future of the Canada-Mexico-United States (CUSMA) trade agreement. Reduced uncertainty is the key ingredient required for a rebound in housing activity, particularly in the regions of Ontario and Quebec hardest hit by the tariffs.
The central bank kept its policy rate at 2.25% last month for the second consecutive meeting and has signalled an aversion to juicing demand at this time. In a speech earlier this month, Governor Tiff Macklem warned that cutting interest rates amid a supply-side shock could stoke inflation.
Written by
Dr. Sherry Cooper Chief Economist, Dominion Lending Centres
The Consumer Price Index (CPI) rose 2.4% on a year-over-year basis in December, following a 2.2% increase in the prior two months.
The year-over-year acceleration in the all-items CPI was driven by the temporary Goods and Services Tax (GST)/Harmonized Sales Tax (HST) break that began on December 14, 2024. This resulted in monthly declines for the exempt goods and services, which have now fallen out of the year-over-year movement, putting upward pressure on headline CPI growth.
The headline CPI accelerated, but the year-over-year decline in gasoline prices in December moderated it. Excluding gasoline, the CPI rose 3.0% in December, following a 2.6% increase in November.
The CPI fell 0.2% month over month in December. On a seasonally adjusted monthly basis, the CPI increased 0.3%.
Various indexes were affected by the GST/HST exemption in December 2024, including restaurant food, alcoholic beverages, toys, games and hobby supplies, children’s clothing and some grocery items, such as potato chips and confectionery.
Year over year, higher restaurant prices were the largest contributor to faster all-items CPI growth in December 2025. Prices for food purchased from restaurants rose 8.5% in December, up from 3.3% in November. Prices for alcoholic beverages served in licensed establishments (+6.5%) and purchased from stores (+5.6%) also rose faster in December.
Prices for toys, games (excluding video games) and hobby supplies rose 7.5% in December, after a 0.5% decline in November. Additionally, prices for children’s clothing accelerated in December (+4.8%) compared with November (+2.4%).
Year-over-year price growth also picked up for potato chips and other snack products (+7.9%) and confectionery (+14.2%).
Despite being unchanged month over month, prices for food purchased from stores rose 5.0% year over year in December. Coffee (+30.8%) and fresh or frozen beef (+16.8%) remained the largest contributors to the increase.
The main core inflation measures decelerated sharply in December, with the BoC’s two measures both easing to their lowest level in a year.
Bottom Line
This report confirms the Bank’s hold on the policy rate. Aside from food prices, inflation seems to be dissipating. The overall economy is in better-than-expected shape, as upward revisions to GDP since 2022 have been largely driven by stronger-than-expected productivity growth, a long-standing concern for the Canadian economy.
The backdrop of stronger growth and lower inflation will keep the Bank of Canada on hold for most of 2026, as the next rate move is likely to be a hike, but not until 2027 unless the US withdraws from CUSMA. In the meantime, the biggest loser in the past year has been the housing market.
The most recent Canadian Real Estate Association data suggests particularly weak activity in Ontario, the region hardest hit by the tariff uncertainty. A cautious Bank of Canada will monitor the effect of rapidly rising food prices on inflation expectations. With any luck at all, core inflation will continue to decelerate, keeping the Bank on the sidelines for much of this year.
Hopefully, greater clarity on the Canada-Mexico-US agreement will be forthcoming. Reduced uncertainty is the key ingredient required for a rebound in housing activity, particularly in the regions of Ontario and Quebec hardest hit by the tariffs.
Written by
Dr. Sherry Cooper Chief Economist, Dominion Lending Centres
Today’s release of December housing data by the Canadian Real Estate Association (CREA) showed the market ended 2025 with declining sales and prices due to ongoing economic uncertainty.
The number of home sales recorded over Canadian MLS® Systems declined 2.7% m/m in December. On an annual basis, transactions totalled 470,314 units last year, a 1.9% decrease from 2024, despite a series of Bank of Canada rate cuts.
“There doesn’t appear to have been much rhyme or reason to the month-over-month decline in home sales in December, which was simply the result of coincident but seemingly unrelated slowdowns in Vancouver, Calgary, Edmonton, and Montreal,” said Shaun Cathcart, CREA’s Senior Economist. “For that reason, it would be prudent for market observers to resist the temptation to trace a line from the end of 2025 into 2026. Rather, we continue to expect sales to move higher again as we get closer to the spring, rejoining the upward trend that was observed throughout the spring, summer, and early fall of 2025.”
New Listings
New supply declined by 2% on a month-over-month basis in December, marking a fourth straight monthly drop. Combined with a slightly larger decrease in sales activity in December, the sales-to-new-listings ratio eased to 52.3% from 52.7% in November. This remains close to the long-term average national sales-to-new listings ratio of 54.9%. Readings roughly between 45% and 65% are generally consistent with balanced housing market conditions.
There were 133,495 properties listed for sale on all Canadian MLS® Systems at the end of December 2025, up 7.4% from a year earlier but 9.9% below the long-term average for that time of year. Inventories have been falling since May 2025 owing to the mid-year rally in demand, meaning active listings could be back posting year-over-year declines around the time this year’s spring market gets going.
“While we remain in the quiet time of year for a little while longer, the spring market is now just around the corner, and it is expected to benefit from four years of pent-up demand, and interest rates that at this point are about as good as they are going to get,” said Valérie Paquin, CREA Chair. “Barring any further major uncertainty-causing events, that means we should see a more active market this year.”
There were 4.5 months of inventory on a national basis at the end of December 2025, up slightly from 4.4 months, which had been the measure since August. The long-term average for this measure of market balance is 5 months of inventory. Based on the measure of one standard deviation above and below that long -term average, a seller’s market would be below 3.6 months, and a buyer’s market would be above 6.4 months.
Home Prices
The National Composite MLS ® Home Price Index (HPI) fell by 0.3% between November and December 2025. It was similar to the dip recorded in November and could reflect some sellers making price concessions to sell properties before the end of the year. Most of the overall price softening in December came from markets in Ontario’s Greater Golden Horseshoe region, which was hit hard by US tariffs.
The non-seasonally adjusted National Composite MLS® HPI was down 4% from December 2024. Under the surface, year-over-year declines are larger for condo apartments and townhomes, and smaller for one- and two-storey detached homes.
Bottom Line
Today’s data end a year that saw house prices drift lower despite falling interest rates, as a simmering trade war with Canada’s largest trading partner caused higher unemployment and considerable job uncertainty. Though US tariffs apply to a limited volume of Canadian goods, and the economy didn’t tip into a recession, the unpredictability of President Donald Trump’s trade policy has stoked a sense of economic insecurity.
In some regions, the price decline has now wiped out a sizable proportion of the gains homeowners saw during the torrid Covid market from 2020 to 2022, when overnight interest rates were reduced to a record-low 25 basis points. Back then, ultralow interest rates caused home prices to surge, particularly in smaller cities to which remote workers fled to take advantage of a lower cost of living.
Vancouver and Toronto remain by far the most expensive large cities. The benchmark price in Greater Vancouver was C$1.14 million in December. In the Toronto region, it was C$962,300 – down about 6% from a year earlier.
With many regional markets soft, sellers are now pulling back. New listings dropped 2% in December from the previous month, the fourth straight monthly decline. But the total number of homes on the market last month was still 7.4% higher than the previous year. That’s the equivalent of about 4.5 months of inventory.
We concur with the view that there is considerable pent-up demand among potential first-time buyers who will likely dip their toe in the market once winter passes. This year, we also see a record volume of refinances and renewals, which will increase monthly mortgage payments and dampen household purchasing power.
Written by
Dr. Sherry Cooper Chief Economist, Dominion Lending Centres
Today’s Canadian Labour Force Survey for December was weaker than expected. Employment was little changed (+8200; 0.0%), and the employment rate held steady at 60.9%. This followed three consecutive monthly increases.
The jobless rate rose 0.3 percentage points to 6.8%, as more people searched for work. The increase in the unemployment rate in December partially offsets a cumulative decline of 0.6 percentage points in the previous two months. Employment rose among people aged 55 and older, while it fell among youth aged 15 to 24.
Full-time employment rose by 50,000 (+0.3%) in December, while part-time employment fell by 42,000 (-1.1%). The decline in part-time work in the month partially offsets a cumulative gain of 148,000 (+3.9%) in October and November. Over the 12 months to December 2025, part-time employment rose at a faster pace (+2.6%; +99,000) than full-time employment (+0.7%; +128,000).
In December, there was little change in the number of private- and public-sector employees, as well as in the number of self-employed workers.
There were 1.6 million people unemployed in December, an increase of 73,000 (+4.9%) from November.
The participation rate—the proportion of the population aged 15 and older who were employed or looking for work—rose by 0.3 percentage points to 65.4%. On a year-over-year basis, the labour force participation rate was unchanged in December. The unemployment rate for youth aged 15 to 24 rose 0.5 percentage points to 13.3% in December, as fewer youth were employed (-27,000; -1.0%). Labour market conditions had previously improved for youth in October and November, with employment rising by 70,000 (2.6%) and the youth unemployment rate falling by 1.9 percentage points over this period.
In 2025, Trump’s tariff policy and negative attitude towards Canada have caused considerable uncertainty, having a marked deleterious effect on the Canadian economic outlook, particularly in sectors dependent on US demand. Job vacancies also fell during 2025.
Bottom Line
The Bank of Canada has reiterated that its primary mandate is price stability, effectively leaving the task of closing the output gap to fiscal authorities. By early next year, it will likely become evident that fiscal support delivered through large capital projects is rolling out too slowly to offset near-term weakness in activity materially. If layoffs persist at their recent pace and the United States were to withdraw from the Canada‑US‑Mexico Agreement, the case for an additional round of monetary easing would strengthen.
Absent that downside scenario, the more plausible path is a slow and limited normalization of policy. Market pricing currently anticipates that the next move by the Bank of Canada will be to raise the overnight policy rate, but that is not likely until at least late this year.
The Canadian real estate industry may focus on rate decisions, but the mortgage industry is watching bond markets. The Government of Canada’s (GoC) 5-year bond yield—a key benchmark for fixed-rate mortgages—has surged in recent weeks, pushing borrowing costs higher instead of providing relief. The move reflects rapid market repricing, driven by stronger economic data and a global trend of rising yields.
What Does Government Debt Have To Do With My Mortgage?
Mortgage rates are based on benchmark borrowing costs for similar terms. The Bank of Canada’s overnight rate gets virtually all the attention, but it only impacts variable-rate mortgages. Canadian borrowers tend to prefer the stability of fixed-rate mortgages, which are priced off GoC bond yields of matching durations. The 5-year is of particular importance, as it’s the traditional weapon of choice for homeowners.
Government bond yields are set by supply and demand. When investor demand grows faster than government borrowing, yields fall. When government borrowing outpaces demand, yields rise to attract capital. Investor appetite is further shaped by inflation and global competition, as capital flows towards markets offering the best balance of risk and return.
Mortgage rates reflect these yields, plus a lender spread.
Canadian Government Bond Yields Are Surging, Applying Upward Pressure On Mortgage Rates
Recent economic data and upward revisions have pushed GoC bond yields sharply higher. The 5-year GoC yield jumped 19 basis points (bps) over 5 days, settling at 3.0% yesterday. It’s added 23 bps over the past month, reaching the highest level since August 2025. Any lender cuts right now would be margin compression, not market-driven.
The odds that this move is a short-lived blip are also fading. Over the past year, the 5-year yield is up 11 bps, barely half of the increase seen in the past month alone. That divergence signals a rapid repricing of expectations rather than a gradual trend, consistent with stickier inflation assumptions and stronger-than-expected economic data.
This is new territory for Canadian real estate. Before 2022, the GoC 5-year yield only touched 3.0% briefly in 2010 and hasn’t been past that threshold persistently since 2008. As financing conditions revert towards those norms, it raises uncomfortable questions about sustainability given that home prices have climbed 105% since 2010, while incomes grew just 35%. This topic warrants a deeper dive at a later date, but it’s worth keeping in mind.
For now, let’s get back to the topic of rising yields—and how this trend is driven by more than local factors.
Canadian Bond Yields Are Being Pulled Higher By A Global Surge
Rising bond yields aren’t just a Canadian phenomenon. This morning BMO Capital Markets released a new research note on rising yields across advanced economies. “…government bond yields across much of the advanced economies this year [are climbing], and despite central bank interest rate cuts in many cases,” explains BMO Chief Economist Douglas Porter.
“In Canada, 10-year GoCs are on track to end the year higher than they began 2025, despite the fact that the BoC has chopped rates 100 bps this year. The late-year shift in BoC rate expectations played a part, but so too has the upward pull from the rest of the world.”
BMO’s analysis places Canada in the context of two key markets: the UK and Japan. The UK tracked closely with Canada for roughly 15 years before its recent divergence, driven by investor concerns over the UK’s fiscal picture. Japan’s long-stagnant economy is now seeing its 10-year yield approach 2% for the first time since the late 1990s.
Government debt across advanced economies competes for global capital based on yield. Central banks can temporarily suppress borrowing costs in an emergency, but that relief comes at the price of higher inflation. Over time, this creates higher funding costs as investors demand a globally competitive yield and protection against inflation and currency erosion.
On November 4, 2025, the Federal Government presented the 2025 Federal Budget, titled “Canada Strong”. There are a number of significant measures that will affect businesses, including immediate expensing for manufacturing and processing buildings, an increase to the expenditure limit for the Scientific Research and Experimental Development (SR&ED) program, and certain clean energy input tax credits.
Additional measures in the Budget include the removal of the Underused Housing Tax, the elimination of the luxury tax on certain aircraft and vessels, and a deferral of the trust reporting requirements for bare trusts to 2026. Also announced were new rules to expand on the anti-avoidance measures relating to the 21-year anniversary of a trust, as well as anti-avoidance rules for the deferral of tax on investment income using tiered corporate structures.
The measures introduced in the Budget are proposals and not all of the announcements may be enacted into legislation. There is still uncertainty as to whether the proposals will ultimately be implemented as outlined in the Budget documents as well as the timing of when they will be effective.
Full details of Budget can be found by clicking here. Summarized below are a few of the items we believe are most relevant to private companies and individuals.
Business Tax Measures
Corporate income tax rates
No changes to the corporate income tax rates are proposed. As such, the income tax rates as of January 1, 2025, will remain as follows:
BC
Combined (Federal and BC)
General
12%
27%
Small business1
2%
11%
1For the first $500,000 of taxable active business income and subject to meeting other requirements.
Immediate expensing for manufacturing and processing buildings
Currently, eligible buildings in Canada used to manufacture or process goods for sale or lease (manufacturing or processing buildings) are prescribed an annual tax deduction rate of ten per cent (capital cost allowance). The Budget proposes immediate expensing (100% tax deduction) for the cost of eligible manufacturing or processing buildings. This includes the cost of eligible additions or renovations made to such buildings. The incentive is available in the first taxation year that the eligible property is used for purposes of manufacturing and processing of goods for sale or lease, and requires that at least 90% of the floor space of the building is utilized for these functions.
This benefit is for eligible property acquired on or after November 4, 2025 and before 2030. The rate of depreciation is reduced to 75% for 2030 and 2031, to 55% for 2032 and 2033, and then after 2033 the enhanced rate will no longer be available.
Tax deferral through tiered corporate structures
The Budget proposes anti-avoidance provisions relating to the deferral of tax on investment income with a corporate structure that has entities with staggered taxation year-ends. The proposed rules would suspend the dividend refund of a payor corporation upon payment of a taxable dividend if the recipient corporation’s balance due date for the taxation year in which the dividend was received ends after the payor corporation’s balance due date for the year in which the dividend was paid.
The corporate tax refund will be suspended until a payment is made by a corporation in the chain to individual shareholders, or to companies which have less than a 10% share ownership or are not under common control (i.e., corporations that are not “connected”). To accommodate genuine commercial transactions, the rule would not apply to a dividend payor that is subject to an acquisition of control where it pays a dividend within 30 days before the acquisition.
The rules will apply to dividends paid in taxation years that begin on or after November 4, 2025.
Enhancement of Scientific Research and Experimental Development (SR&ED) Tax Credits
The expenditure limit qualifying for the higher investment tax credit rate of 35% is proposed to be increased to $6M annually. This is a significant change from the proposed $4.5M limit announced in the 2024 Fall Economic Statement. The increased limit applies retroactively to taxation years beginning on or after December 16, 2024.
Certain proposals from the 2024 Fall Economic Statement were also confirmed by the government in that there is still an intention to implement the changes. This includes the enhanced investment tax credit rate of 35% (versus the lower 15%) being available to small Canadian public companies and larger private corporation groups, based on taxable capital. Previously, the higher rate was only available for Canadian-controlled private corporations. The phase out of the higher rate begins at $15M of taxable capital (increased from $10M) amongst an associated group, and is eliminated at $75M (increased from $50M). Certain capital expenditures used in SR&ED will qualify for a 100% deduction. Further, the budget contains a plan for an elective pre-claim approval process for vetting of SR&ED projects in advance by the CRA, with a targeted review time of 90 days.
Critical Mineral Exploration Tax Credit (CMETC) and Canadian Exploration Expense (CEE)
The budget expands the eligibility for the CMETC (which is equal to 30% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors) for the following criterial minerals: bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin, and tungsten. This applies to expenditures renounced under eligible share agreements entered into after November 4, 2025 and on or before March 31, 2027. Starting November 4, 2025, the budget also clarifies that expenses incurred for purposes of determining the quality of a mineral resource do not include expenses relating to determining the economic viability or engineering feasibility of the mineral resource.
Personal Tax Measures
Personal Income Tax Rates
There were no changes to the personal income tax rates except for a decrease to the lowest federal tax bracket from 15% to 14.5% for 2025, and to 14% for 2026 and later taxation years. The lowest federal tax bracket of 14.5% for 2025 applies to taxable income of up to $57,375.
B.C.’s top personal income tax rates for 2025 continue to be as follows:
Personal Top Marginal Rates (Income above $259,830)
Interest and regular income
53.50%
Capital gains
26.75%
Eligible dividends
36.54%
Non-eligible dividends
48.89%
Note: The tables shown above represent the combined Federal/BC Provincial personal tax rates.
Home Accessibility Tax Credit
Applicable to 2026 and subsequent taxation years, expenses claimed under the Medical Expense Tax Credit cannot also be claimed under the Home Accessibility Tax Credit. The Home Accessibility Tax Credit is a non-refundable tax credit that applies at the lowest personal income tax rate on up to $20,000 of eligible home renovation or alteration expenses per calendar year.
Canadian Entrepreneurs’ Incentive
The Budget affirms that the elimination of the proposed capital gains inclusion rate increase would result in the removal of this proposed measure.
Personal Support Workers Tax Credit
The Budget proposes to introduce a temporary credit which would provide eligible personal support workers working for eligible health care establishments with a refundable tax credit of 5 percent of eligible earnings, providing a credit value of up to $1,100. The person must ordinarily provide one-on-one care and essential support to optimize and maintain another individual’s health, well-being, safety, autonomy, and comfort, consistent with that individual’s health care needs as directed by a regulated health care professional or a provincial community health organization. The person’s main employment duties must include helping patients with activities of daily living and mobilization. The Budget states that amounts earned in BC are not considered eligible earnings.
Alternative Minimum Tax (AMT)
The Budget confirms that the government intends to proceed with proposed legislation relating to the AMT, including one measure that would restrict the deduction of investment counsel fees (portfolio management fees) to 50% of the expense for purposes of calculating the AMT.
Other Tax Measures
21-year anniversary rules for trusts
The anti-avoidance provisions relating to the 21-year anniversary deemed disposition rules for trusts are proposed to be expanded to include indirect transfers of trust property to other trusts, effective on or after November 4, 2025. These measures are intended to address tax planning that avoid the deemed disposition to beyond the 21-year timeframe, including cases where trust property is transferred on a tax-deferred basis to a corporate beneficiary that is owned by a newly settled trust.
Trust reporting requirements for bare trusts
The Budget confirms the government’s intention to proceed with proposed draft legislation as it relates to reporting requirements for bare trusts, however the rules are now proposed to become effective for taxation years ending December 31, 2026 or later. Therefore, bare trusts are not required to file T3 trust income tax returns for the 2025 tax year.
Luxury tax on aircraft and vessels
The Budget will cease the luxury tax on subject aircraft (with a value over $100,000) and vessels (with a value over $250,000) after November 4, 2025, but will remain applicable to vehicles costing over $100,000.
Carry back rule for estates
One proposal announced in Budget 2024 was to extend a loss carry back for qualifying estates from the first taxation year, to the first three taxation years instead. The Budget provides that this will proceed with retroactive effect to deaths on or after August 12, 2024.
Underused Housing Tax (UHT)
The UHT will be repealed entirely for the 2025 taxation year and onwards. As a result, no UHT would be payable and no UHT returns would be required to be filed.
Automatic tax filing for lower-income individuals
The Budget proposes to provide the CRA with discretion to file a tax return on behalf of lower-income individuals for 2025 and onwards. Eligible individuals include those that have a taxable income below the federal basic personal amount or provincial equivalent (for 2025, the federal amount is $16,129), where all of the income of the individual is from sources for which specified information returns (such as a T4 slip) have been filed with the CRA, and the individual has otherwise not filed a tax return within 90 days following the filing deadline for the year. The individual then has 90 days to review the processed filing by the CRA and submit any changes, or may opt-out of automatic tax filing.
Previously announced tax measures reaffirmed
The Budget confirms that the government intends to proceed with certain previously announced tax measures including: capital gains rollover on Small Business Investments, Substantive Canadian Controlled Private Corporations, exemptions for Employee Ownership Trusts, Excessive Interest and Financing Expenses Limitation Rules, Lifetime capital gains exemption changes, and other rules.
For more information on how any of the proposed changes may have on your business or you, contact your Rise Advisor.
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