Canada’s Economic Crisis and Toronto Real Estate

Canada’s Economic Crisis and What It Means for Toronto Real Estate: An Economist’s Breakdown

If you follow the headlines, Canada’s economy is doing fine. GDP is growing. Unemployment dipped for a month. The government says things are on track.

If you look at the actual data, the picture is very different.

I sat down with economist Konstantin Polyakov on Episode 3 of the Supply and Demand podcast to cut through the noise and talk about what is actually happening in Canada’s economy — and what it means for anyone buying, selling, or holding real estate in Toronto and York Region. Konstantin is a mortgage broker who works with economic data every day, and he’s one of the sharpest minds I know when it comes to connecting the macro picture to what’s happening at your kitchen table.

This is not a doom-and-gloom conversation. It’s a clear-eyed look at where we are, what’s likely coming, and how to think about it if you own property or are considering a purchase.

The Headlines Are Deceiving — Here’s What the Data Actually Shows

Let’s start with the uncomfortable truth. When Konstantin and I looked at the real numbers — not the headline numbers — the economic picture in Canada is significantly weaker than most people realize.

“Headlines are deceiving. Things are not good. In fact, things are so not good that every seven and eight out of 10 appraisals do come in below what they should be.”
— Konstantin Polyakov, Economist & Mortgage Broker

That appraisal statistic is striking. When 70-80% of property appraisals are coming in below expected values, it tells you something fundamental about the state of the market. It’s not that buyers are wildly overpaying — it’s that there are so few transactions happening that appraisers don’t have enough comparable sales to work with. The data itself is thin, and thin data produces unreliable valuations.

For sellers in Toronto, this creates a real practical problem: even when you get an offer you’re happy with, the appraisal can come back short and jeopardize the entire deal. For buyers, it means the financing process has an extra layer of uncertainty that didn’t exist a few years ago.

GDP Per Capita Is Negative — And Has Been for Two Years

One of the most important points Konstantin and I discussed is the gap between headline GDP and what economists call GDP per capita — the measure of economic output per person. Politicians love to point to the top-line GDP number because it keeps going up. But there’s a reason it keeps going up, and it has nothing to do with productivity.

“Our politicians will point to that GDP number which they’re inflating via immigration. When you really look at the numbers, when you really dig into it, GDP per capita is in negative. And has been for the last two years and will probably get worse. And so we’re not gonna immigrate our way out of that problem.”
— Adam Nadler, Supply and Demand Podcast

This matters for real estate because GDP per capita is what actually determines whether Canadians can afford to buy homes, service mortgages, and sustain property values. If the economy is growing only because the population is growing — but each individual is getting poorer — that’s not the kind of growth that supports a healthy housing market.

The employment data tells a similar story. July 2025 saw a net loss of approximately 40,000 jobs. The month before looked better on paper, but as Konstantin explained, that improvement was largely artificial:

“In employment opportunities, there is none. Canada isn’t creating jobs really. We’re creating some jobs in a public sector… Those numbers were completely fudged and we shouldn’t be including those. There was no growth in employment.”
— Konstantin Polyakov

The June numbers had included temporary Elections Canada positions from April, making the data look better than reality. When you strip out those temporary government jobs, the private sector — the part of the economy that actually generates wealth and sustains housing demand — is stagnant.

Interest Rates: Why Banks Are Pricing the Three-Year Term Lowest

If you’re shopping for a mortgage right now, you’ve probably noticed that three-year fixed terms are priced more favourably than five-year terms. Most people assume that’s just normal market movement. Konstantin sees it as a signal.

“I think the reason they’re pricing three-year terms the best is because they’re saying, okay, look, we have a pretty good idea of what to expect under this government… So we’re gonna rate this distance as the lowest possible risk. And if you take any longer, let’s say four or five year term, well, those rates are higher ’cause we actually don’t know what’s gonna happen in those four or five years.”
— Konstantin Polyakov

In other words, banks are telling you — through their pricing — that they’re reasonably confident about the next three years (government stimulus, economic support measures) but much less certain about what comes after. The spread between three-year and five-year rates is essentially a measure of institutional uncertainty about Canada’s medium-term economic trajectory.

For buyers and homeowners renewing their mortgages, this has practical implications. A three-year term may offer better rates today, but you’ll be renewing in a period that banks themselves consider less predictable. There’s no universally right answer here — it depends on your risk tolerance and financial situation — but understanding why the rates are priced that way helps you make a more informed decision.

Variable Rate Mortgages Are Riskier Than They Used to Be

Konstantin also flagged an important shift in how Canadians should think about variable-rate mortgages. During the era of near-zero interest rates, variable was essentially a stable, cheaper product. That era is over.

“I think we’re now entering the territory where variable truly, really and truly is a risky product. Like you can get really quite a bit of savings out of it, but it’s the kind of a thing that you have to really watch. Like you take it, but then you convert it the second that you feel that the pendulum is really swinging the other way.”
— Konstantin Polyakov

The reason is that economic cycles are compressing. The swings between stimulus and tightening are happening faster and going further in each direction. That makes variable-rate products inherently more volatile than they were during the long period of stable, low rates that many borrowers got accustomed to.

The Government Spending Cycle — And Why It Matters for Your Home Value

One of the most illuminating parts of our conversation was Konstantin’s breakdown of the spending cycle Canada is entering. Here’s the sequence, simplified:

1. Stimulus phase (now): The government is spending heavily — military, infrastructure, economic support — to offset the impact of trade tensions with the US. This spending is larger than the COVID-era stimulus.
2. Short-term stability (next 2-3 years): That spending keeps the economy moving. Employment doesn’t collapse. Housing stays afloat.
3. The bill comes due (3-5 years out): All that spending creates inflationary pressure. The next government inherits the problem and has to tighten — likely through higher interest rates and reduced spending.

“We’re going into a period of government spending and the last time we had government spending, we got so out of hand that we ended up having to really raise interest rates and really tighten the vault… If we’re doing all the same things that we did in 2020, 2021, ’22 — maybe not exactly, but we’re still gonna be doing a lot of the same.”
— Konstantin Polyakov

For real estate, this means the near-term outlook is actually more stable than the fear-driven headlines suggest. Government spending supports employment and economic activity, which supports housing demand. But the medium-term outlook — the three-to-five-year window — carries real uncertainty, particularly around inflation and interest rates.

This is why timing and term selection on your mortgage matter more right now than they have in years.

The Condo Market: Banks, Developers, and a Ticking Clock

Konstantin revealed something that most buyers and sellers in the GTA don’t know about: how major banks are handling the flood of new condo completions.

Here’s the short version. When a developer builds a condo tower, they often arrange financing with a major bank. That bank also gets the right to offer exclusive mortgage programs to buyers in that development. When the condos finally close and values have dropped significantly from when buyers signed their purchase agreements, the bank faces a dilemma: if they order fresh appraisals, many deals will collapse because the units are worth less than the purchase price.

“You have major financial institutions, the big five, that are giving out at loan-to-value ratios that are above 100%. Knowingly giving out bad debt. And so what we end up in is a situation where these are uncharted waters — completely.”
— Adam Nadler

The banks’ solution, in many cases, is to bypass the appraisal entirely and honour the original purchase price. It keeps the deals closing and the capital flowing. But it means there are condos being financed at values that don’t reflect the current market — and if those owners need to sell or refinance in the next few years, the gap between what they owe and what the unit is worth could be significant.

This doesn’t mean a crash is imminent. As we discussed on the podcast, real estate debt is uncallable — as long as the mortgage payments are being made, the lender can’t force a sale. But it does mean the condo segment in Toronto carries elevated risk, particularly for investors relying on rental income in a softening rental market.

What Canada Needs to Build — And It’s Not More Condos

Perhaps the most important takeaway from our conversation was Konstantin’s perspective on what actually fixes the underlying problem. It’s not more rate cuts. It’s not more immigration. It’s production.

“We don’t have like TSMC in Canada to be able to have something that nobody else has that everybody has to be nice to us for… We don’t produce anything. No one is going to continually buy up our real estate forever.”
— Konstantin Polyakov

Canada’s economy has become overly dependent on real estate as a wealth generator. When your primary economic engine is people buying and selling homes to each other at increasingly higher prices, you’re building on sand. What the country actually needs is exportable productivity — energy, natural resources, technology — things the rest of the world wants to buy.

There is a positive note here. Construction permits for purpose-built rental and multi-unit housing are at historically high levels, with hundreds of thousands of units in the pipeline over the next three to five years. If those units deliver genuinely affordable housing, it could ease the cost-of-living pressure that’s driving talent and investment out of Canada.

“For every period of decline there is going to be a period of improvement. Decline is not forever… Even in the worst of times, there will be opportunities.”
— Konstantin Polyakov

What This Means If You’re Buying or Selling in Toronto Right Now

Here’s the practical summary for homeowners, buyers, and sellers in Toronto and York Region:

1. The near term (1-3 years) is more stable than it feels. Government stimulus is keeping the economy moving. Rates are likely to stay manageable. This is not 2008.
2. The medium term (3-5 years) carries real uncertainty. The spending bill will come due, and whoever is in power will face difficult choices about inflation and rates. Plan accordingly.
3. Appraisals are unreliable right now. Low transaction volume means thin comparables. If you’re selling, be prepared for appraisals to come in below your expectations — and factor that into your pricing strategy.
4. Mortgage term selection is more important than ever. Understand why three-year terms are priced lowest before you choose one. Talk to a qualified mortgage professional — not the internet.
5. The condo market carries elevated risk. Particularly for investors. Do your due diligence on the building, the developer, and the rental market before committing.
6. Think long-term. Real estate in Toronto remains a fundamentally sound long-term asset. The question is not whether the market will recover — it’s whether your timeline and financial position can weather the adjustment period.

Frequently Asked Questions

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