As we enter 2026, Canadian mortgage-seekers are not only concerned about interest rates but also about the supply-demand dynamics in the housing market. With housing supply continuing to be a major challenge, shortages could exacerbate the pressure on home prices and, consequently, on mortgage rates. This blog explores how housing supply shortages might impact mortgage rates and what homebuyers and investors need to keep in mind as they navigate 2026.
The State of Housing Supply in Canada: A Snapshot
According to CMHC’s Fall 2025 Housing Supply Report, housing supply in Canada’s key metropolitan areas has faced regional disparities. Although housing starts have remained near record-high levels in some cities like Calgary and Edmonton, other areas, including Toronto, Vancouver, and Halifax, have seen declines. In particular, Toronto has been experiencing its lowest housing start levels in 30 years, primarily due to economic uncertainty, weak demand, and a slowdown in investment.
While ground-oriented housing (such as single-detached and semi-detached homes) grew in more affordable regions, it slowed in high-cost markets. These dynamics have created severe affordability challenges for many would-be homeowners in regions like Toronto and Vancouver, where supply constraints have driven up prices, making homeownership less accessible.
How Housing Shortages Drive Up Home Prices
The ongoing shortage of housing supply in Canada’s key markets has had a direct impact on home prices. As demand for homes outpaces supply, competition increases, pushing prices higher and placing upward pressure on mortgage rates. As home prices climb, lenders may adjust mortgage rates to reflect the increased risk associated with higher-value loans.
- Limited availability of new homes means higher demand for existing homes, especially in major urban areas.
- As buyers compete for a limited number of homes, price inflation occurs, resulting in rising home values and the increased need for larger mortgages.
- Rising home prices typically lead to increased borrowing costs for buyers, further tightening affordability.
The Shift to Rental Housing and Its Effects on Mortgage Markets
Another key takeaway from CMHC’s report is the growth in rental construction. While purpose-built rental apartments are increasingly in demand, condominium construction has slowed. This shift is largely due to the changing demand dynamics caused by both high demand for rentals and the struggle to meet pre-sale thresholds for condos.
In cities like Toronto and Vancouver, condo developers have faced challenges as a result of slower pre-sales and economic uncertainty. These challenges have resulted in delays and project cancellations, leading to slower condo supply.
For mortgage-seekers, this means a potential shift in focus toward rental properties and long-term leasing. However, as rental construction increases, the demand for homeownership may remain strong, especially in urban areas, driving up home prices even further.
The Role of Mortgage Rates in a Tight Housing Market
With housing supply continuing to lag behind demand in key markets, mortgage rates are likely to remain under pressure. Higher demand coupled with limited housing stock tends to make homes more expensive, which in turn raises the cost of mortgages. As we head into 2026, the Bank of Canada’s policy rate will be influenced not only by inflationary pressures but also by housing affordability challenges.
If housing supply shortages persist, it could lead to higher interest rates, particularly in high-demand cities. In areas like Toronto and Vancouver, where the lack of supply is most acute, mortgage seekers may face higher costs as lenders adjust their risk assessments in response to soaring home prices.
What Can Mortgage Seekers Do?
Given the ongoing housing supply issues in Canada’s largest markets, prospective homebuyers and investors need to be strategic when securing a mortgage in 2026.
- Prepare for Rising Prices: Homebuyers should be prepared for the possibility of higher home prices in key markets, especially in cities facing significant housing shortages. This may also mean higher mortgage rates to cover larger loans.
- Consider Less Expensive Areas: While some cities will face significant price pressures, regions like Calgary and Edmonton may present more affordable options. In these markets, ground-oriented homes experienced growth in the first half of 2025, making them a more attractive choice for budget-conscious consumers.
- Work with a Mortgage Broker: A mortgage broker can help you navigate rising rates and home prices by securing the best possible deal for your situation. With CMHC’s rental housing programs offering a viable solution to high demand, exploring your mortgage options early can help you prepare for a market that may be more expensive in the long run.
As housing supply shortages continue to impact major Canadian markets, homebuyers and mortgage-seekers in 2026 will face increased pressure on both home prices and mortgage rates. While the Bank of Canada’s monetary policy plays a significant role in rate decisions, the ongoing supply-demand imbalance will likely continue to affect mortgage affordability, especially in cities like Toronto, Vancouver, and Halifax.
Understanding these market dynamics and planning ahead will be key to navigating the challenges ahead in 2026.