Don’t expect a meltdown despite the continuing geopolitical turbulence and interest rate volatility
The chaos that’s weighed against Canada’s housing market throughout the year is showing no sign of fading, with a weeks-long climb in bond yields threatening to cloud the outlook even further for potential homebuyers heading into fall.
Buyers were already grappling with plenty of economic uncertainty thanks to rising oil prices, inflation fears, and the new turbulence caused by the outbreak of a full-blown trade war between Canada and the US at the end of August.
The housing market slipped against that backdrop last month. New figures by the Canadian Real Estate Association (CREA) showed actual unadjusted activity across the national market fell by 6.9% compared with the same time last year, and national sales were down 0.7% on a seasonally adjusted month-over-month basis.
But while a jump in five-year Government of Canada bond yields is also putting upward pressure on fixed mortgage rates, few in the mortgage industry are panicking about the fall outlook just yet.
Drew Donaldson (pictured top), mortgage broker and principal at the Toronto-based Donaldson Capital, told Canadian Mortgage Professional he wasn’t expecting a prolonged slump in market activity despite the current headwinds.
“The fall market and Q4 is typically a strong finish to the year and we’re expecting even with higher rates that it’ll remain busy and pick up steam,” he said.
A spike in 10-year US Treasury yields has roiled the bond market elsewhere, including in Canada. Still, Donaldson doesn’t see that turmoil continuing into next year. “We’re concerned – we’re paid to analyze all the risks in the market and provide sound advice,” he said.
“Having said that, we expect after the US mid-term [elections] for the bond market to settle down, and 2027 should see more favourable conditions.”
Hike, hold, or cut: BoC faces another conundrum
Adding to the unpredictability facing the housing market for the rest of the year is an economic picture that seems to be shifting rapidly for the Bank of Canada.
The central bank opted to leave its policy rate unchanged in its most recent decision, and economists suggested US-Canada trade tensions could see the Bank adopt a more dovish tone next year if the economy sagged under the force of US tariffs.
However, oil price shocks caused by the Iran war have raised fears that inflation could be on the way up in the months ahead, potentially spurring the BoC into rate hikes to get the consumer price index (CPI) under control.
For now, inflation pressures have remained largely in check. The CPI was unchanged last month, staying still at 3.0% for the second month in a row, and while Donaldson could still see a rate hike ahead, he’s still betting on a trend towards lower rates at some point next year.
“I’m expecting either no change or a max of 25 basis points rate increase,” he said about the outlook for the remainder of 2026. “In 2027, we wouldn’t be surprised to see a few cuts as expectations can change quickly.”
‘Monitor the risks, but also plan for opportunity’
The tariff dispute with the US has dominated the housing market discourse over the past 18 months, and with no indication that negotiators will strike a deal soon to ease the current tensions, its shadow will likely continue to loom over the housing sector for now.
For Donaldson, that trade war remains the single biggest factor that will determine when Canada’s housing market finally posts a strong rebound. “A trade deal with the US would be a huge vote of confidence to our economy,” he said.
But in the meantime, few are expecting a market meltdown – and Donaldson is urging prospective buyers to focus on the wider outlook, rather than zeroing in on the current uncertainty.
“Homebuyers and investors shouldn’t just look at the current macro picture today and make their decisions,” he said. “Look out six to 12 months and see where things are headed. Monitor the risks, but also plan for opportunity that could present itself.”
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