Posthaste: Canada’s troubled housing market just got hit with another headwind

Canadian home prices are down 20 per cent from their peak in early 2022. Photo by Bloomberg

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Canada’s beleaguered housing market just can’t catch a break.

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Over the past few years it has struggled under rising interest rates, trade turmoil and economic uncertainty. Now the Iran war has added another headwind: soaring oil prices.

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What does the price of crude have to do with real estate?

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Stephen Brown, deputy chief economist at Capital Economics, said though the surge in oil due to the conflict in the Middle East should eventually boost Canada’s gross domestic product, in the short term the threat of inflation is putting upward pressure on borrowing costs.

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“There is no relief in sight for the troubled housing market, with the spike in global oil prices likely to push up mortgage rates in the coming weeks,” he said.

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When the Bank of Canada held its interest rate at 2.25 per cent last week, governor Tiff Macklem said policy makers would “look through” the immediate shock of higher oil prices. Markets at that point were predicting just one 25-basis-point hike this year.

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But within days that had shifted dramatically, with traders in overnight interest rate swaps betting that Canada’s central bank would raise rates by 75 basis points in 2026, starting with a quarter-point hike in July, Bloomberg reported.

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Donald Trump’s about-face on Iran strikes Monday lowered that bet to 2.5 hikes, but today oil prices are on their way back up.

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“The market is ignoring Macklem’s more patient and measured messaging,” said Benjamin Reitzes, rates and macro strategist at Bank of Montreal. “Focus is on the hawkishness of other central banks and fears of further escalation of the conflict in Iran.”

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Market bets on rate hikes are pushing up government bond yields which in turn influence mortgage rates. This could cause five-year fixed rates to rise from an average of 3.8 per cent recently toward 4 per cent, said Brown.

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An oil shock is one of the last things Canada’s real estate market needs right now, said MortgageLogic.news strategist Robert McLister.

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“An oil supply disruption not only sours buyer sentiment further, but it can also drag down asset prices generally and make borrowing more expensive. With leverage already maxed out for most buyers, especially younger ones, higher rates would further squeeze maximum mortgage amounts and what homebuyers can afford to pay,” he wrote in a column for the Financial Post. 

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Evidence that Canada’s housing market continues to struggle showed up loud and clear in the latest numbers from the Canadian Real Estate Association.

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Home sales slipped another 1.3 per cent nationally in February, with the MLS Home Price Index falling for the 15th month in a row, said Rachel Battaglia, an economist with Royal Bank of Canada. 

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Canadian home prices are down 20 per cent from their peak in early 2022.

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Though fewer sellers came to market in February, inventories remain at a six-year high which is likely to put more pressure on prices in coming months, said Battaglia.