Homebuyer confidence could take a hit if the tariff dispute isn’t resolved quickly
The Bank of Canada likely won’t be inclined to raise interest rates anytime soon – but the escalating US-Canada trade war will still probably weigh on the Canadian housing market if it rumbles on for long, according to a top economist.
Sal Guatieri (pictured top), director and senior economist at BMO Capital Markets, told Canadian Mortgage Professional that cross-border tension, which saw a flurry of tariffs and retaliatory measures imposed last week, is likely to give potential homebuyers more pause for thought than the ongoing Iran conflict has.
“I definitely think the housing market will be impacted more by the escalating trade war than the Iran war,” he said. “Yes, higher oil prices and gasoline prices are not good. They tend to drain spending power, but that will have more of a negative impact on broader consumer spending as opposed to the housing market.
“But it is the concern that if we see more tariffs and an escalating trade war, people start worrying about their jobs and they’ll be in no position to make one of the biggest investments of their lives by buying a house. So until we see some clarity and de-escalation of trade tensions, I think the housing market could remain pretty fragile for a while.”
No good news for housing market amid tariff strife
The Bank of Canada’s decision to hold rates steady on Wednesday morning means the outlook remains unchanged for Canadian homebuyers and owners on a variable-rate mortgage.
Its trendsetting interest rate will stay at 2.25%, where it’s sat since last December. Wednesday’s decision marks the seventh time in a row the central bank has left rates where they are.
But while hopes were high earlier in the year that buyer confidence would eventually seep back into the market and bring Canadians off the sideline, Guatieri sees the latest trade ructions pushing back a hoped-for recovery.
“We were seeing clear signs of stability in the harder-hit regions – Ontario and British Columbia more recently,” he said. “Sales were stabilizing, if not picking up. Prices were starting to stabilize. But I think any hopes of a meaningful recovery could be on the back burner if the trade war continues to escalate.”
The BoC’s conundrum: are inflation or growth risks higher?
Bank of Canada governor Tiff Macklem highlighted continuing inflation risks in his Wednesday press conference, but while inflation concerns might normally support the case for a rate hike, Guatieri doesn’t see one happening in the months ahead.
That’s because the trade war also looks likely to negatively impact the growth outlook for Canada’s economy, meaning a possible trend toward lower interest rates in the long run.
“I think the bigger concern is that the trade war escalates, and that should tend to keep, if anything, downward pressure on longer-term interest rates,” Guatieri said. “But unfortunately, that will greatly weigh on homebuyer confidence and perhaps delay any recovery in the housing market – especially in Ontario and British Columbia.”
Macklem said the likely impact on inflation of Canadian counter-tariffs on the US will be “fairly modest” and said the ongoing crisis in the Middle East, which started when the US and Israel attacked Iran in late February, remained the bigger driver of inflation concerns.
It remains to be seen what direction the trade war takes, and whether a further escalation is in store or the two sides can find an offramp. But for now, an extension of the BoC’s prolonged rate hold looks its most likely path ahead as decisionmakers weigh how tariffs are affecting the national economy.
“We just don’t see the Bank of Canada moving policy in either direction unless something breaks,” Guatieri said. “Il oil prices push above $100 and we start to see some spillover to broader goods and services prices, yes, they might be forced to nudge interest rates higher.
“But then again, if we see further tariffs and escalation of the trade war, they may be forced to move in the opposite direction.”
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