The Bank of Canada has cut interest rates from 5% to 2.25%—a massive 2.75 percentage point drop since June 2024. Mortgage rates have fallen from 6-7% to 3.5-4.5%. On paper, this should have triggered a buying frenzy.

Instead, GTA home sales in 2025 hit 30-year lows. Prices remain near 5-year lows. Listings are up 76% year-over-year. It’s a buyer’s market… except buyers aren’t buying.

What’s going on? Why aren’t lower rates working? Here’s the real story behind Toronto’s affordability paradox.

Here’s why lower interest rates haven’t sparked a housing recovery in the GTA.

Table of Contents

1. The Rate Cuts Are Real—But So Is the Problem

2. Five Reasons Lower Rates Aren’t Helping

3. What Would Actually Help?

4. When Will the Market Actually Recover?

5. Should You Buy Now or Wait?

6. The Bottom Line

Key Takeaways

• The Paradox: Despite interest rates dropping from 5% to 2.25%, GTA home sales have hit 30-year lows.

• Qualifying Barrier: The mortgage stress test requires buyers to qualify at rates much higher than they actually pay, neutralizing much of the rate cut benefit.

• Economic Fear: High unemployment and trade uncertainty are keeping potential buyers on the sidelines.

• Valuation Gap: Even with lower rates, the price-to-income ratio in Toronto remains at a staggering 12.7x, far above historical affordability levels.

The Rate Cuts Are Real—But So Is the Problem

First, let’s acknowledge: rates HAVE dropped significantly.

On a $700,000 mortgage, that’s the difference between $4,628/month (at 6.5%) and $3,700/month (at 4.5%)—a savings of nearly $1,000/month. So why isn’t this fueling demand? Let’s break down the paradox.

Five Reasons Lower Rates Aren’t Helping

1. The Stress Test Still Crushes Qualifying Power

Even with a 4.5% mortgage rate, Canadian buyers must qualify at 6.5% (the stress test rate). This means:

• You need to prove you can afford payments as if rates were 2% higher
• This dramatically reduces how much you can borrow

Example: A household earning $150,000/year can afford roughly $600,000 at actual rates of 4.5%. But the stress test assumes 6.5%, limiting them to about $500,000 in borrowing power.

The stress test prevents buyers from “catching the lower rates.” It’s designed this way to prevent defaults—but it also suppresses demand.

2. “Catching a Falling Knife” Psychology

Prices are still falling. GTA average home prices dropped 4% in 2025. Condos are down 20-30% from peak.

When buyers see prices dropping month after month, they think: “Why buy now if it’ll be cheaper next month?”

This creates a self-fulfilling prophecy. Buyers wait. Sellers get desperate. Prices drop further. Buyers wait longer.

3. Economic Uncertainty and Job Fears

The U.S. tariff war has created massive uncertainty:

• Unemployment rose to 6.8% in December 2025
• Sectors like auto, steel, and lumber saw major layoffs
• 25% of Canadians say they’re less likely to make major purchases due to trade tensions

People don’t buy $800,000 homes when they’re worried about losing their jobs. Even with lower rates, committing to a 25-year mortgage feels risky.

4. Reduced Immigration = Less Demand

Canada dramatically cut immigration targets in 2025. Fewer new permanent residents and temporary workers means:

• Less demand for rental properties
• Fewer first-time homebuyers
• Softening prices in areas that relied heavily on newcomers

Immigration was a major driver of GTA housing demand. Without it, even low rates can’t compensate.

5. Prices Are STILL Too High

This is the uncomfortable truth. Even after falling 20-30% from peak, GTA homes are expensive relative to incomes.

Median household income in Toronto: ~$85,000

Median home price in GTA: ~$1,084,000

Price-to-income ratio: 12.7x (historically, 3-5x is considered affordable)

Even with 4.5% rates, the average family can’t afford the average home. Rate cuts help—but they don’t solve the fundamental affordability crisis.

What Would Actually Help?

If rate cuts alone aren’t enough, what would stimulate the market?

1. Economic Certainty

Resolution of the U.S. trade conflict would restore business and consumer confidence. People buy homes when they feel secure about the future.

2. Continued Price Declines (Yes, Really)

Prices need to fall another 10-15% to reach a sustainable level where average families can afford average homes. This is painful for sellers but necessary for market health.

3. Stress Test Reform

Lowering the stress test from 6.5% to 5.5% would significantly increase buying power without creating excessive risk. This is politically controversial but economically logical when rates are 4.5%.

4. Income Growth

Wage growth needs to outpace home price growth for several years to restore affordability. This is a slow process.

5. Supply Increase (Long-Term)

Building more homes—especially purpose-built rentals and mid-density housing—would ease pressure. But this takes years.

When Will the Market Actually Recover?

• The consensus among economists:

  2025-2026: Continued Weakness

  • Sales volumes remain low
  • Prices stabilize but don’t recover
  • Buyers wait for economic clarity
  • Sellers become more realistic about pricing

  2027: Gradual Recovery Begins

  • Trade tensions ease
  • Employment strengthens
  • Pent-up demand begins flowing into market
  • Price appreciation returns (but slowly)

  2028-2029: Normal Market Conditions Return

  • Sales volumes normalize
  • Prices grow 3-5% annually (sustainable)
  • Supply shortage becomes a concern again (few projects launched 2024-2025)

Should You Buy Now or Wait?

This depends entirely on your situation:

Buy Now If:

• You plan to live in it 7-10+ years (ride out the downturn)
• You have a secure job and emergency fund
• You’ve found a property you genuinely want at a price you can afford
• You’re not trying to time the market—you’re buying a home

Wait If:

• Your job is unstable or in a tariff-affected sector
• You’re stretching to afford the payment
• You’re buying for investment/speculation purposes
• You believe prices will drop another 10-15% (and you’re willing to risk being wrong)

The Bottom Line

Lower interest rates are helping—but they can’t fix everything:

• The stress test limits how much rate cuts actually help borrowing power
• Economic uncertainty keeps buyers on the sidelines
• Falling prices create a wait-and-see mentality
• Homes are still expensive relative to incomes
• Reduced immigration has lowered demand

The paradox is real: rates are falling, affordability is improving, but buyers still aren’t buying. It will take economic stability, not just monetary policy, to revive the GTA housing market.

If you’re navigating this market—whether buying or selling—the key is focusing on your personal circumstances, not market timing. Get pre-approved to understand your buying power, work with an experienced agent who knows GTA submarkets, and make decisions based on your 5-10 year plan, not 5-10 month forecasts.

Disclaimer: This article provides general information about the GTA real estate market and interest rate environment. It should not be considered financial or investment advice. Market conditions change rapidly. Consult with licensed real estate and financial professionals for personalized guidance.

About the Author: Aman Harish

Aman Harish is a Co-Owner and Mortgage Broker at Canadian Mortgage Services. With over 14 years of experience navigating the complexities of the Canadian lending landscape, Aman specializes in helping homeowners and buyers develop proactive renewal strategies and optimize their debt structure in challenging economic climates. His commitment is to ensuring clients not only secure the best rates but also build long-term financial resilience.