While CREA sees a milder pace of activity ahead than expected, others say there’s cause for mild optimism – even though challenges are continuing
Headwinds are continuing to swirl around Canada’s housing market, with the threat of new US tariffs looming over the economy and plenty of uncertainty about how the US-Iran war could impact inflation and interest rates in the months ahead.
That economic unease was part of the reason the Canadian Real Estate Association (CREA) once again downgraded its forecast for full-year home sales last week, with higher oil prices and inflation fears expected to weigh against homebuyer sentiment in the coming weeks.
But others are somewhat more bullish on the outlook. Bank of Montreal (BMO) chief economist Doug Porter (pictured top) told Canadian Mortgage Professional the bank’s economists are “getting ever so slightly more positive” about the forecast than CREA, even if they aren’t expecting a huge upsurge in activity between now and the end of the year.
Part of the reason for that optimism is a shift in the regional pattern that’s defined the market in recent years. High-profile markets including Toronto and southwestern Ontario have struggled but appear to be stabilizing, even while others that had been performing better – including Montreal, Calgary, Edmonton, and Atlantic Canada – are cooling.
Porter also pointed to the Bank of Canada’s statement last week following its decision to hold interest rates steady, which indicated that companies are slowly getting used to the new era of economic turbulence and uncertainty.
“It’s not that the shocks of trade and high oil prices have gone away, but like the Bank said, it looks as if the economy and businesses are learning how to adapt to this new reality and moving on,” he said. “And I think ultimately that will be true for the housing market as well.”
Still, a caveat: much depends on the central bank holding the line on rates rather than reversing course and moving rates higher. Markets have already begun pricing in a better-than-even chance of a hike before year-end, with those expectations hardening amid the latest escalation in the war in Iran last week.
Rate-hike risk remains the key swing factor for buyers
Porter said even a modest shift in the rate outlook could be enough to dent buyer sentiment, regardless of how far rates have fallen since the Bank’s benchmark rate sat at 5% a couple of years back.
“I always say every basis point matters to somebody,” he said. “So I do think the signal of higher rates would weigh on confidence. And the reality too is it would at least dent sales. My very mild optimism on housing is based on the assumption that the Bank does not raise rates.”
Fed shift under Warsh could add a cross-border wrinkle
South of the border, new Federal Reserve chair Kevin Warsh has struck a hawkish tone since taking over the role, doubling down on a plan to quell what he’s described as an inflation “tax” on Americans.
That could signal rate hikes ahead in the US, something that may prove a worrying development for Canada’s housing outlook.
“On balance, insofar as the Fed is a bit more hawkish or tougher than what many expected – if that’s true, it does put a little bit of pressure on the Bank of Canada,” Porter said. “Not a lot, but it puts a little bit of pressure because it can weigh on the Canadian dollar if there’s too much separation between the US and Canada.
“And of course, it can push up long-term interest rates as well. So it’s not great news for the Canadian housing market if Warsh is indeed more hawkish than expected.”
That said, it’s still too early to draw firm conclusions about Warsh’s approach, Porter said, emphasizing that the new Fed chair has so far presided over only one meeting without a policy change.
He suggested that much of Warsh’s tough public messaging may reflect an effort to establish independence from the White House rather than signal a fixed policy path.
“I think a lot of this is frankly posturing,” he said. “Actions speak louder than words when it comes to the Fed.”
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