The conflict in Iran is driving oil prices higher and adding another layer of uncertainty to Canada’s housing market, experts say. Combined with questions about how the upcoming review of the Canada–U.S.–Mexico Agreement (CUSMA) will unfold, it is making the Bank of Canada’s next interest rate moves even harder to predict. (Next BoC interest rate announcement is July 15.)
A prolonged conflict in the Middle East, along with higher tariffs, would likely put more pressure on the housing market and slow activity further. But even if the Iran war ends quickly and Canada secures a favourable outcome in the CUSMA review, a strong housing market rebound is unlikely, according to Randall Bartlett, deputy chief economist at Desjardins Group.
“Right now, the market is in something of a holding pattern. We expect progress to be measured and steady over the next couple of years rather than rapid.”
The Bank of Canada left its key interest rate unchanged at 2.25 per cent this week, a decision that was widely expected. Looking ahead, however, the direction of rates remains unclear. Governor Tiff Macklem described the current level of uncertainty as “acute” and signaled that the central bank is comfortable waiting for more clarity on both the Iran conflict and ongoing trade tensions.
The longer oil and gas prices remain elevated, the less likely it becomes that lower borrowing costs will provide a boost to the housing market. Concerns about economic weakness that might otherwise justify a rate cut could take a back seat to worries about inflation caused by higher energy prices.
The Iran conflict has already added volatility to energy markets. Oil prices have swung sharply and remain well above levels seen earlier this year. Gasoline prices, remain elevated creating another inflation risk that the Bank of Canada must consider alongside the outcome of the CUSMA review.
The downside scenarios for Canada’s economy are more concerning. If CUSMA moves to annual reviews, the effective tariff rate could rise to nearly 10 per cent. If the agreement were abandoned altogether, tariffs could climb to 25 per cent.
“In either of those downside scenarios, you end up in a situation where there’s weaker economic activity, rising unemployment, and ultimately that’s going to be a drag on the housing market because you’ll have fewer buyers entering the market,” Bartlett said.
At the same time, some experts believe the economic strain the Iran conflict could place on the U.S. may improve Canada’s position in CUSMA negotiations. Bartlett also notes that Canada could benefit from higher oil prices because it remains a major energy exporter.
Still, with so many possible outcomes tied to both the Iran conflict and the CUSMA review, Bartlett believes it may make sense for the Bank of Canada to return to using multiple economic scenarios in its forecasts rather than relying on a single outlook.
For homebuyers, mortgage rates are already beginning to reflect some of this uncertainty. Penelope Graham, a mortgage expert at Ratehub.ca, says five-year fixed mortgage rates have started to edge higher. These rates tend to follow government bond yields, which have risen alongside U.S. Treasury yields amid growing geopolitical risks and inflation concerns.
As a result, some borrowers are changing their mortgage strategy. While five-year fixed rates are hovering around four per cent, variable-rate mortgages are available for as low as 3.35 per cent, making them increasingly attractive to some buyers.
But Graham warns that choosing a variable-rate mortgage remains a significant gamble.
Bartlett says that if the Iran conflict is resolved quickly and Canada achieves a favourable outcome in the CUSMA review, mortgage rates could gradually ease as investor confidence improves and more money flows into Canadian bonds. However, she expects any improvement in the housing market to unfold gradually rather than happen overnight.