Recent data from Rentals.ca has shed light on evolving conditions in Canada’s rental housing market. The average asking rent across the country declined to $2,030 in the most recent month, returning to levels last seen in 2023.
In the period following COVID-19, Canada experienced an influx of international students and temporary workers that significantly increased housing demand in a short period of time, contributing to a sharp tightening in rental supply. The recent easing in rents appears to reflect a partial reversal of that trend. Federal policy changes—including caps on international student permits and tighter restrictions on temporary workers—combined with the departure of some existing students and workers, have slowed population growth and reduced pressure on the rental market.
While there are areas worthy of optimism—most notably the improvement in rental affordability, with average rent as a percentage of household income falling below 30% for the first time since February 2021—we continue to see several developments that may present potential risks.
The first risk is the continued decline in property prices, with year-over-year price changes remaining negative since the start of 2025. If housing prices continue to fall, residential developers could face increasing pressure. As prices decline, the spread between construction costs and the eventual sale price narrows, eroding project profitability. This dynamic could lead to a rise in project cancellations or delays, particularly in the condominium markets of Toronto and Vancouver, where meeting pre-sale thresholds has already become more challenging in early 2026.
A second area of risk lies within the banking sector. While Canadian banks are generally conservative in their lending practices, a sustained decline in home prices would likely lead to higher provisions for credit losses (PCL). In such a scenario, the focus shifts from whether borrowers can continue servicing their mortgages to whether the underlying collateral—the home itself—adequately supports the value of the loan. At present, we assign a low probability to this outcome, as banks have already been gradually increasing their PCL buffers. However, a sudden shift in interest rates or broader economic conditions could alter that outlook.
The third risk is the broader macroeconomic impact stemming from the conflict in the Middle East. The closure of the Strait of Hormuz has caused energy prices to surge. At the time of writing, Brent Crude Oil is hovering just above $100 per barrel, levels not seen since the early stages of the Russian invasion of Ukraine.
The impact has quickly transmitted into interest rates. Canada’s 2-year government bond yield has risen from roughly 2.4% on February 27 to over 2.8% by March 12, an increase of more than 40 basis points in just two weeks. As a result, markets are now assigning roughly a 50% probability that the Bank of Canada could raise interest rates as early as September.
For now, market expectations remain anchored to the assumption that the conflict will be relatively short-lived, with some estimates—including comments from Donald Trump—suggesting the war could end within six weeks. However, we caution that the longer the conflict persists, the greater the strain on financial markets. Sustained energy price increases risk pushing interest rates higher, which in turn places downward pressure on the valuation of most asset classes.
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