The war in Iran is reinforcing the “stalemate” in Canada’s housing market, experts say, adding to lingering uncertainty around the Canada–U.S.–Mexico Agreement (CUSMA) and reducing the already slim chances of a Bank of Canada (BoC) rate cut later this year.
Any combination of a protracted Middle East conflict and higher tariffs would likely slow real estate activity further. But even a quick resolution of the Iran war and a positive CUSMA review outcome wouldn’t bring about a dramatic rebound, says Randall Bartlett, Desjardins Group’s deputy chief economist.
”We’re in a situation now where it’s a bit of a stalemate,” he told Yahoo Finance Canada in an interview. “Certainly, it’s going to be a slow grind higher for the next couple of years.”
Economists widely expect the BoC to keep its policy rate at 2.25 per cent on Wednesday. Beyond that, uncertainty abounds. Odds of a cut later this year faded against the backdrop of the Iran conflict — then last week’s weak job market data have prompted some economists to push back on the idea of a rate hike to counter inflation pressures.
A boost for the housing market via lower borrowing costs becomes less likely the longer gas prices stay elevated, says Royal LePage CEO Phil Soper. “I believe the economic concern that might lead to a rate cut is going to be pushed to the side and the Bank of Canada is going to be more worried about higher energy prices and how those filter through the economy and show up in other ways.”
The Iran conflict has added volatility to energy prices, with crude costs seesawing but considerably higher than earlier this year. Gas prices have already begun to rise, and the broader inflationary effects of an oil shock are a new variable the Bank’s governors must weigh alongside the outcome of the CUSMA review.
A recent Desjardins report outlines three potential outcomes for that review, with the baseline keeping the agreement intact and the effective tariff rate on Canadian exports holding around 2.7 per cent — leading to a “fragile recovery.”
The alternative paths are more dire and likely to slow the housing market even further — with the effective tariff rate rising to nearly 10 per cent if CUSMA becomes subject to annual reviews, and 25 per cent if the agreement is scrapped altogether. That most dire scenario is likely to trigger a recession in 2027.
“In either of those downside scenarios … you end up in a situation where there’s weaker economic activity, rising unemployment rate, and ultimately that’s going to be a drag on the housing market in that you’ll have fewer buyers entering the market,” Bartlett said.
However, experts also believe the added economic pressures the Iran war is likely to create in the U.S. may give Canada an advantage in CUSMA talks. And Bartlett notes that higher oil prices could also boost Canadian economic activity, since the country remains a major energy exporter.
Nonetheless, given the wide range of outcomes for both the CUSMA review and the Iran war, it wouldn’t be unreasonable for the BoC to “revert to providing alternative scenarios” for its economic outlook, Bartlett says — a reference to the central bank’s decision to abandon a single base case last year due to U.S. trade policy — “because it is so uncertain and it is so challenging in this environment.”
For housing, five-year fixed mortgage rates have already begun to rise, says Penelope Graham, a mortgage expert at Ratehub.ca. Those rates tend to track government bond yields, which have moved higher alongside U.S. Treasury yields amid “geopolitical uncertainty and inflation pressures,” she notes.
While markets in Canada’s largest cities are largely muted, Ann-Marie Lurie, chief economist for the Calgary Real Estate Board, says Alberta remains a notable outlier. Migration from other provinces and an economy somewhat sheltered from the trade war have helped keep Calgary’s market moving.
Higher energy prices as a result of the Iran conflict are a “double-edged sword” for the province, she says — while they can spike inflation for everyone, they also drive government revenues and bonuses in the energy sector that can fuel higher-paid professional and tech jobs.
“People are still active in our market in a pretty normal way,” Lurie said, noting that Calgary’s detached home market is currently “unperturbed” by the national gloom. Alberta could also gain from the federal government’s renewed interest in national projects, which could include new pipelines — an option made more attractive by the Middle East conflict.
“Optimism is really tied to seeing movement in pipeline or business investment related to natural gas,” Lurie said. “Those are areas that offer a lot more upside in terms of improving investment that trickles down into consumers willing to invest in housing — because they know that’s going to attract employment.”
For those looking to buy despite the uncertainty, a new tactical shift is emerging in the mortgage market. With five-year fixed rates hovering around four per cent, many borrowers are pivoting back to variable-rate mortgages, which Ratehub.ca’s Graham says can be as low as 3.35 per cent.
Given the uncertainty around the BoC’s path, variable mortgages remain “a high-stakes bet,” she notes. “You are gambling that the Bank of Canada will eventually prioritize a trade-war slowdown over energy-driven inflation.”
Bartlett notes that while a quick resolution to the Iran conflict and a CUSMA win could eventually lower mortgage rates by attracting foreign investment into Canadian bonds, he says the recovery will be measured in years, not months.
Soper’s perspective is similar — even a positive outcome for the CUSMA review isn’t likely to translate into a hot housing market. Part of what will prevent a pandemic-style price spike, he says, is the “safety valve” created by the slowdown in Canada’s population growth.
“We’ve got enough inventory and fewer new buyers than we typically would in a recovery market,” he said. “So I don’t see a spike even if we get a deal and it takes uncertainty off the table.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
Download the Yahoo Finance app, available for Apple and Android
dailynewsnblog
