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Housing Supply, Affordability, and Inflation, Why Buying a Home Still Feels Hard in Canada
December 23, 2025 | Posted by: Lorne Andrews
Housing Supply, Affordability, and Inflation, Why Buying a Home Still Feels Hard in Canada
Many Canadians were hopeful that easing inflation and early interest rate relief would make buying a home easier. Yet for first-time buyers and existing homeowners alike, affordability still feels out of reach. Even as headlines suggest improving conditions, the reality on the ground remains challenging.
The reason comes down to a combination of limited housing supply, population growth, inflation pressures, and how mortgage rates affect borrowing power. These forces are interconnected, and understanding how they work together can help buyers make more informed decisions rather than relying on headlines alone.
In this article, we break down why housing affordability remains strained across Canada, what has changed, what has not, and what buyers should realistically expect moving forward.
Why Inflation Still Matters to Homebuyers
Inflation has been one of the biggest economic stories in Canada over the past few years. While inflation has eased from its peak, it remains an important factor in housing affordability because it directly influences interest rates and household costs.
When inflation is elevated, the Bank of Canada keeps its policy rate higher to slow spending and stabilize prices. Even modest inflation above target can delay meaningful rate cuts, which affects mortgage rates and borrowing costs.
For homebuyers, this means that even if inflation is trending down, mortgage rates may not fall as quickly as expected. As a result, monthly payments remain higher than many buyers were accustomed to in the past decade.
Inflation also impacts affordability beyond interest rates. Everyday expenses such as groceries, utilities, transportation, and insurance have risen, leaving households with less room in their budgets to qualify for a mortgage.
Housing Supply Remains the Core Challenge
The most persistent issue in Canadian housing is not demand alone, it is supply. Simply put, Canada has not been building enough homes to keep up with population growth.
New housing construction faces constraints including labor shortages, higher material costs, zoning restrictions, and lengthy approval timelines. Even when demand softens temporarily, these supply limitations keep prices from falling significantly.
Population growth has added further pressure. Canada's population has increased rapidly in recent years, driven largely by immigration. New households need places to live, and when supply does not keep pace, competition remains strong.
This imbalance explains why home prices in many regions have stayed resilient even during periods of higher interest rates. Fewer listings combined with steady demand continue to support prices.
Why Lower Rates Alone Will Not Fix Affordability
Many buyers are waiting for interest rates to fall, hoping that lower rates will restore affordability. While rate cuts can help improve borrowing power, they are not a complete solution.
When mortgage rates decline, more buyers can qualify, which often increases competition. Without a meaningful increase in housing supply, lower rates can push prices higher, offsetting some of the affordability gains.
This dynamic has played out before in Canada. Periods of falling rates have frequently been followed by renewed price growth, particularly in supply constrained markets.
Affordability improves most sustainably when income growth, housing supply, and borrowing costs move in balance. Rate relief alone cannot solve structural shortages.
What This Means for First-Time Buyers
First-time buyers are facing one of the most difficult entry points in decades. Higher mortgage rates reduce qualifying amounts, while elevated home prices increase required down payments.
Government programs and incentives can help, but they do not fully bridge the gap for many households. As a result, first-time buyers often need to adjust expectations around location, home type, or timing.
Despite these challenges, opportunities still exist. Some buyers are finding success by purchasing smaller homes, considering alternative neighborhoods, or partnering with family for down payment support.
Preparation matters more than ever. Understanding credit, budgeting conservatively, and securing a strong mortgage pre-approval can make a meaningful difference in competitive situations.
What Existing Homeowners Are Experiencing
Existing homeowners face a different set of challenges. Many are renewing mortgages that were originally secured at much lower interest rates, leading to higher payments even if their loan balance has declined.
Some homeowners are delaying moves or renovations due to affordability concerns, contributing further to limited housing supply. When fewer people list their homes, inventory remains tight.
For those considering upsizing, higher borrowing costs can significantly impact monthly payments. This has caused many homeowners to stay put longer, reinforcing the supply shortage.
Refinancing options may still be available for homeowners with sufficient equity, but qualification rules are stricter and careful planning is essential.
The Role of Mortgage Rules and Qualification Stress Tests
Canada's mortgage stress test continues to play a significant role in affordability. Buyers must qualify at a higher rate than their actual contract rate, which reduces the maximum amount they can borrow.
While the stress test is designed to protect borrowers from future rate increases, it also limits purchasing power, particularly in higher priced markets.
Even if mortgage rates fall modestly, the stress test will remain a constraint for many buyers unless there are policy changes. This adds another layer to why affordability has not improved quickly.
Why Waiting Is Not Always the Answer
Many buyers are choosing to wait, hoping conditions will improve significantly. While waiting can make sense for some households, it is not a guaranteed path to better affordability.
If rates fall and demand rises without corresponding supply increases, competition may intensify. This can lead to higher prices and bidding pressure.
The right time to buy is often more about personal readiness than market timing. Stable income, manageable debt, and long-term housing needs should guide the decision.
Buyers who focus solely on predicting rates risk missing opportunities that align with their financial situation and lifestyle.
How Buyers Can Navigate Today's Market
While the market is challenging, buyers are not without options. A strategic approach can help improve outcomes even in a constrained environment.
- Understand your true affordability, not just the maximum you qualify for
- Explore different mortgage terms and structures
- Be flexible on property type or location when possible
- Work with professionals who understand current lending rules
- Plan for long-term stability rather than short-term rate movements
These steps do not eliminate affordability challenges, but they help buyers make informed decisions grounded in reality rather than speculation.
Looking Ahead for Canadian Homebuyers
Housing affordability in Canada remains under pressure because the underlying issues are structural, not temporary. Inflation trends, interest rates, housing supply, and population growth all influence outcomes.
Progress will likely be gradual rather than dramatic. Incremental improvements in rates and supply may help over time, but buyers should expect ongoing competition in many markets.
By understanding the forces at play and planning carefully, Canadian buyers can navigate today's market with confidence rather than uncertainty.
Frequently Asked Questions
Why are home prices still high even with higher interest rates?
Limited housing supply and strong demand continue to support prices, even when borrowing costs rise.
Will lower interest rates make homes more affordable?
Lower rates can help, but without more housing supply they may also increase competition and prices.
Is it better to wait to buy a home in Canada?
Waiting can make sense for some buyers, but affordability depends on personal finances, not just market timing.
How does inflation affect mortgage rates?
Inflation influences Bank of Canada policy decisions, which impact interest rates and mortgage pricing.
What can first-time buyers do to improve affordability?
Careful budgeting, flexibility on home type or location, and strong mortgage planning can help improve options.
