The Top 5 Risks for Toronto Housing Market in 2025

Real estate in Toronto is headed into 2025 with cautious hope and residual uncertainty. Although current statistics point to some areas of recovery, various factors could upset this delicate equilibrium. From growing new condo completions to the volatility of interest rates, buyers and sellers must negotiate a complex and changing housing scene.

This blog will examine the five most pressing risks facing Toronto's housing market in 2025.

1. New Condo Completions: The Value Gap and Closing Challenges

One of the most significant risks is the expected completion of new condos in 2025. Many of these condos were bought years ago at a 30-40% premium over current resale properties. Although buyers expected ongoing price increases, Toronto's condo prices have remained steady over the past four years. Thus, these units are unlikely to retain the value first projected.

Banks typically require buyers to raise their down payments to cover the difference when a property is valued less than the original purchase price. Many financial institutions avoided this problem in 2024 by applying "blanket appraisals," which projected properties' worth based on their original purchase price. However, as the value difference becomes more challenging to overlook in 2025, such forgiving policies could prove less practical.

Why Does This Matter?

More purchases could pass if consumers cannot or are reluctant to cover the shortfall. Although a flood of project cancellations is improbable, individual buyers could face a tremendous financial burden. Although the federal government, banking authorities, and significant financial institutions are supposed to step in to stop mass defaults and market instability, there is still the possibility of a quiet revolution.

2. Rental Market Pressure: Rising Supply, Falling Demand

Toronto's rental market will also likely suffer from the spike in new condo completions. Investors bought many of these new apartments, and once they are finished, they most likely will be rented. This flood of rental supply coexists with a notable change in population growth patterns.

Canada's population rose by 1.3 million in 2024. Recent federal policy changes, however, are expected to slow the population increase in 2025 and 2026, primarily by drastically reducing the number of non-permanent residents. With an already high degree of rental inventory, this declining demand will likely cause rental prices to drop.

Why Does This Matter?

With fewer tenants in the market and more units available, landlords could experience longer vacancy times and reduced rental returns. Those who relied on rental income to cover mortgage payments may find themselves in a difficult situation, especially if interest rates stay high. Moreover, this can lead to increased investor exits and downward pressure on condo prices.

3. Small Condo Struggles: An Oversupplied Segment

Toronto's small condos have had tough times, and 2025 will not likely bring relief. In 2024, a flood of investor-owned small units swept the market, boosting supply in the face of poor demand. However, small units are less appealing as an investment tool due to flat condo prices, softening rents, and continually high borrowing rates. Inventory in this market stays strong as more investors choose to sell rather than hang on.

Why Does This Matter?

In the small condo market, ongoing overabundance could lower prices even further. This could offer prospective purchasers seeking cost control a chance. However, this trend points to a protracted period of lower returns and lessened property value increases for current owners and investors.

4. Economic Headwinds: Construction Slowdowns and Tariff Risks

Toronto housing market is not isolated but deeply intertwined with broader economic conditions. In 2025, several macroeconomic factors will threaten housing stability.

One of the main worries is the slowing down in new house starts. Developers are postponing future projects even while thousands of condo buildings are scheduled for completion. Rising building costs, market uncertainty, and less investor appetite help explain this. Should demand recover, the difference between built units and new homes could lead to a longer-term housing scarcity.

Simultaneously, continuous trade conflicts—especially with the United States—may increase the economic burden. New taxes or trade interruptions could cause job loss, lower consumer confidence, and general financial uncertainty.

Why Does This Matter?

Economic uncertainty could lower buyer demand even more, especially for pre-construction projects. Furthermore, job losses in the building industry could aggravate affordability issues, especially for first-time buyers who depend on consistent employment to enter the market.

5. Interest Rate Uncertainty: Managing Expectations

The path of interest rates could be the most erratic factor influencing 2025. Buyers and sellers hope for significant rate cuts to increase affordability and restart price increases.

Variable-rate mortgages should find some relief, as the Bank of Canada is predicted to continue lowering rates until 2025. Still, the significant best-case scenario has declined from the 3-4%. Linked to the five-year Government of Canada bond yield, fixed mortgage rates continue under pressure from steadily rising U.S. bond yields.

Why Does This Matter?

If interest rates do not drop as sharply as anticipated, many buyers could stay priced out of the market. Those expecting a price explosion motivated by reduced borrowing costs could be let down, which would cause ongoing stagnation in the resale and new building sectors.

Navigating the Risks: What Buyers and Sellers Should Know

While these risks present considerable challenges, there are ways for market participants to stay ahead:

• Buyers: Buy pre-construction units carefully. Ensure you have enough financial flexibility to manage possible assessment shortfalls. Look for discounts in the oversupplied small condo market.
• Sellers: If you are thinking about selling, price it realistically. Delaying a sale and expecting a rate-driven price increase might not be realistic in 2025.
• Investors: Review your portfolio carefully. If you depend on rental income, be ready for more competition and rent stagnation. Consider spreading your investments to lower your sensitivity to Toronto's condo market volatility.

Conclusion

Toronto's housing market will be at a crossroads in 2025. Though there are indications of stability, actual risks arise from the interaction of new condo completions, changes in the rental market, economic pressures, and uncertain interest rates. Buyers, sellers, and investors must remain educated and flexible to negotiate this changing terrain properly.

Connect with the team at Bungalow Finder for expert guidance and the latest market insights. They can help you make informed decisions in 2025's challenging housing market.

FAQs:

Q: Why are new condo completions a concern for 2025?

Many newly constructed condos might be less than their purchase price, forcing buyers to pay for the shortfall or risk defaulting.

Q: How will the rental market in Toronto be affected in 2025?

Slower population growth and an influx of new rental properties are expected to decrease rental demand, resulting in longer vacancy times and reduced rental prices.

Q: Will interest rates drop significantly in 2025?

Although the Bank of Canada might lower rates, significant declines below 4% are unlikely and could restrict progress in home affordability.

Q: How should buyers and investors prepare for Toronto's 2025 housing market?

While investors must consider reduced rental yields and increased market competitiveness, buyers should be financially prepared for appraisal shortfalls.