Canadian Mortgage Market 2020: The Year Everything Changed

March 2020 was a turning point for the Canadian mortgage market. In 23 days, the Bank of Canada cut its overnight rate three times, from 1.75% to 0.25%. Open houses stopped. Then, in the second half of the year, the housing market posted a record year instead of the downturn many expected.21

This is a review of the Canadian mortgage market in 2020: the rate cuts, the spring freeze, the rebound, and what it meant for borrowers in Ontario.

Three Emergency Cuts in Three Weeks

The Bank of Canada entered 2020 with the overnight rate at 1.75%, where it had sat since October 2018. By the end of March, it was at 0.25%, the effective lower bound, the lowest the Bank had ever gone.63

The timeline was extraordinary:

• March 4: Scheduled cut of 50 basis points to 1.25%, citing global uncertainty from COVID-19.
• March 13: Unscheduled emergency cut of 50 basis points to 0.75%, as financial markets seized.
• March 27: Another 50 basis point cut to 0.25%, the effective floor.

Three cuts totaling 150 basis points in less than a month. The Bank also began large-scale asset purchases to keep credit markets functioning.

The message was clear: the central bank would do whatever it took to keep credit markets functional during the pandemic. While real estate transactions froze, the financial plumbing held.

The Spring Freeze: When the Market Stopped

Physical-distancing measures and emergency orders in March and April 2020 sharply limited in-person showings and open houses. Buyers could not easily tour homes, and many sellers pulled listings.

The numbers tell the story. GTA home sales fell 67% in April 2020 compared to April 2019, and new listings fell 64.1%, according to the Toronto Regional Real Estate Board.8 Calgary sales fell 63% in April, per the Calgary Real Estate Board, and Greater Vancouver sales were 62.7% below the region's ten-year April average, per the Real Estate Board of Greater Vancouver.910

What made the freeze manageable was the federal government's emergency response. CERB launched in April, providing $2,000 per four-week period to Canadians who had lost income.11 Banks offered mortgage deferrals of up to six months. These measures prevented a wave of forced sales and gave homeowners breathing room during the worst of the uncertainty.

The Unexpected Rebound

By May and June, something unexpected happened. Virtual tours became standard. Digital document signing replaced in-person closings. And buyers started coming back.

The second half of 2020 was one of the strongest periods in Canadian real estate history. National MLS resales hit 551,392 units for the full year, a new annual record, up 12.6% from 2019, per the Canadian Real Estate Association. By December, the seasonally adjusted annualized sales rate reached 714,516 units, the first time it had topped 700,000, and actual sales were up 47.2% from December 2019. The sales-to-new-listings ratio reached 77.4% in December, among the highest levels on record, with 2.1 months of inventory nationally, the lowest reading on record for that measure.7

Prices followed. The MLS Home Price Index, which adjusts for the mix of homes sold, was up 13% year over year by December.7

The Urban-to-Suburban Shift

The pandemic did not just change how many homes sold. It changed where people wanted to live.

With remote work suddenly the norm for millions of Canadians, the calculus shifted. A 500-square-foot downtown Toronto condo made less sense when the office was the kitchen table. Buyers who previously would not have considered locations outside the city core started looking at smaller Ontario communities.

In December, CREA reported its largest year-over-year price gains, above 30%, in Ontario markets such as Quinte & District, Simcoe & District, Woodstock-Ingersoll and the Lakelands region.7

This urban-to-suburban migration was the defining trend of 2020 housing, and it is still playing out as we enter 2021. Whether it becomes permanent depends on how employers handle the return to office, a question nobody can answer yet.

Where Mortgage Rates Landed

By the end of 2020, Canadians had access to some of the lowest mortgage rates in the country's history. The prime rate, which sets variable mortgage pricing, fell to 2.45% in March 2020, the lowest on record at the time, and stayed there through year-end.12 Advertised five-year fixed rates also fell sharply, though the exact rate available to any given borrower depended on the lender and on whether the mortgage was insured.

One important detail: the mortgage stress test qualifying rate was the greater of the borrower's contract rate plus 2% or a Bank of Canada benchmark five-year rate, which sat far above actual contract rates. Even with record-low actual rates, borrowers still needed to prove they could handle a much higher payment. This meant qualification amounts did not increase as dramatically as rates fell, providing a meaningful brake on how much people could borrow.54

What This Meant for Real Borrowers

Illustrative example, not a real client: a young couple in Kitchener rethinks everything. Two professionals working from home since March, renting a one-bedroom in midtown Toronto for $2,200 per month. With a combined income of $140,000 and $80,000 saved, they bought a three-bedroom semi-detached in Kitchener for $499,000 in September 2020. Assuming an insured mortgage with the premium added, a five-year fixed rate of 1.89% and a 25-year amortization, principal and interest came to about $1,800 per month, before property tax, insurance and heat, compared with their Toronto rent of $2,200. Their commute became irrelevant because there was no commute. The trade-off: if offices reopen full-time, they face a 90-minute drive each way. For now, the math works.

This kind of trade-off played out thousands of times across Ontario in the second half of 2020. It was not just about affordability. It was about a fundamental rethink of what proximity to a downtown office was worth.

Heading into 2021: What We Are Watching

As we close out 2020, several questions loom over the 2021 mortgage market:

• How long will rates stay this low? The Bank of Canada said in December 2020 that it would hold the overnight rate at 0.25% until economic slack is absorbed so that the 2% inflation target is sustainably achieved, while continuing its bond purchases. On its projection, that would not happen until into 2023.13 Forecasts like that can change.
• Will the suburban boom continue? If remote work becomes permanent for even 30% of the workforce, suburban and exurban demand will remain elevated. If employers force a full return to office, the math changes.
• What happens when deferrals fully unwind? Around 16% of mortgages in Canada were deferred at some point after the start of the pandemic. By September 2020 deferral rates had fallen well below their peak, and arrears on expired deferrals were below pre-pandemic levels, though the Bank of Canada cautioned it was too early for firm conclusions.14 The long tail of pandemic job losses has not fully played out.
• Is this a bubble? Record-low inventory, record-low rates, and record-high prices are a combination that makes many analysts uncomfortable. Whether 2020's surge represents sustainable demand or a speculative overshoot is the central debate heading into the new year.

We work with borrowers every day who are working through these exact questions. There is no single right answer, but there is a right process: understand your numbers, compare your options, and do not make a five-year commitment based on assumptions about a market that nobody fully understands right now.