How Inflation Affects Real Estate Valuations

The Economic Tailwind: A Transition to Stability

As we close out 2025, the Canadian real estate market is transitioning from a period defined by aggressive interest rate hikes to one marked by cautious stability. The forecast for 2026 is defined by this shift: while the frenzy of the pandemic-era market is firmly behind us, demand remains robust, underpinned by historic levels of immigration and persistent housing undersupply. This transition year is expected to be less volatile, allowing both buyers and sellers to operate with greater predictability. The key trend for 2026 is not explosive price growth, but a gradual, measured return of transaction volume as consumer confidence stabilizes alongside borrowing costs.

The Interest Rate Anchor: Moderate Cuts, Steady Affordability Constraint

The most significant factor shaping the 2026 market will be the policy decisions of the Bank of Canada (BoC). Assuming inflation remains under control, the BoC is widely expected to enact moderate, gradual interest rate cuts throughout the year. While these cuts will be welcomed, they are unlikely to return rates to the ultra-low levels seen earlier in the decade. Consequently, affordability will remain the primary constraint, keeping many buyers on the sidelines or forcing them to compromise on property size or location. This environment stabilizes debt service costs for current owners but ensures price growth will be limited by what the average household can reasonably afford to borrow.

Price vs. Volume: A Recovery in Sales Transactions

For much of late 2024 and 2025, the market experienced depressed sales volumes despite resilient prices. The 2026 forecast projects a clear reversal of this trend. With rate stability reducing fear and increasing buyers' capacity to qualify for loans, sales volume is expected to see a noticeable recovery, potentially growing by 10% or more year-over-year. However, the national average home price is forecasted to experience only modest single-digit growth (in the low-to-mid single digits) as inventory levels slowly improve and affordability constraints temper enthusiasm. The market will see a healthy rebalancing, prioritizing transactions over dramatic price gains.

The Persistent Challenge of Supply and New Construction

The demographic pressures driving the market remain immense: Canada’s high immigration targets continue to fuel demand across all housing types. Despite this, the supply side of the equation remains severely constrained. High construction material costs, coupled with slow municipal permitting processes, continue to hinder the creation of new housing units. This persistent supply-demand imbalance acts as a strong price floor for all properties. For investors and developers, this points to continued opportunity in the multi-family sector, particularly in high-density urban areas, where demand for rental housing is projected to outstrip supply well into the latter half of the decade.

Market Bifurcation: Urban Density and Secondary Market Maturation

The 2026 market will not be homogenous; expect a clear bifurcation across property types and regions. Major metropolitan areas, particularly Toronto and Vancouver, will see demand heavily focused on high-density living (condos and townhouses) as buyers maximize affordability within city limits. Meanwhile, secondary and tertiary markets that experienced explosive growth earlier will see maturation; while they remain attractive due to relative affordability, their price growth will likely normalize and trail the recovery seen in urban centers. Investors should focus on assets in urban cores and areas benefiting directly from new public transit infrastructure.

Strategic Outlook: Prudence and Patience for Buyers and Sellers

For buyers, 2026 offers a window of opportunity: increased inventory and fewer frantic bidding wars than previous years, coupled with the potential for rate relief. The strategy should focus on having finances fully prepared to act decisively when a well-priced listing appears. For sellers, patience is key. While the days of instantaneous, unconditional sales may be over, properties that are correctly priced, professionally staged, and located in high-demand areas will continue to sell quickly and for strong value. Overall, 2026 is poised to be a year of healthy, rational market recovery, rewarding strategic planning over speculative risk.