Iran Conflict Volatility Hits Canadian Housing Market, Mortgage Rates Rise
The war being waged by the United States and Israel against Iran is having more knock-on effects than rising fuel prices. In Canada, the housing market is starting to feel the pinch as geopolitical tensions create economic uncertainty.
Rising Mortgage Rates
As tensions escalate in the Middle East, five-year fixed mortgage rates went up by about a quarter of a percent last month as oil price volatility continues to cause havoc. "Just as Canadian gas prices rose quickly at the pump, Canadian fixed mortgage rates rose quickly once bond yields rose, as lenders scrambled to cover their cost risks," said True North Mortgage CEO Dan Eisner.
He explained that if the Strait of Hormuz continues to be closed or restricted for an extended period, that will keep oil prices higher. Almost 20% of the global oil supply sails through the strait, which Iranian officials have targeted since the war broke out in late February.
For people looking to buy a home or renew their mortgage this spring, it may be cheaper to choose a variable rate after three- and five-year fixed rates increased. However, if there is no sight to the end of hostilities, a fixed rate may be a safer bet in the longer term.
"Some of our clients aren't up for the risk of variable-rate changes — especially considering the now-real potential for change on the horizon due to the conflict in Iran," Eisner said. "In that case, they often feel more comfortable choosing a shorter fixed-rate term, hoping to renew sooner into better rates than with a five-year term."
Weak Housing Market
Meanwhile, a recent TD Bank analysis of the provincial housing market forecasts steep downgrades this year for home resales and price growth. "While severe weather in Central and Atlantic Canada weighed on activity early in the year, weakness was also evident in B.C., where conditions were more temperate," said Rishi Sondhi, an economist with TD.
"Sales are likely to take most of the year to recoup first quarter losses, as housing remains constrained by a subdued economy, heightened uncertainty, and ongoing cost of living pressures."
Sondhi also believes interest rates will generally not be a factor in the housing market this year, but "strained affordability continues to weigh on demand," while falling prices will keep potential buyers holding off from making a purchase.
There appears to be some good and bad news for the Greater Toronto Area. "The GTA condo market remains the weakest in the country, with elevated supply needing to be absorbed before prices stabilize," Sondhi said. "Conditions favour buyers across the GTA, surrounding regions, and Southwestern Ontario, while markets are somewhat firmer in Eastern Ontario and considerably tighter in Northern Ontario."
Bank of Canada Rates Held Steady
Last month, the Bank of Canada held its benchmark interest rate at 2.25% as Governor Tiff Macklem cited economic uncertainty. However, the conflict in Iran is heightening the precarious outlook.
Canada's gross domestic product saw a 0.6% contraction in the fourth quarter, which was weaker than expected following a 2.4% increase in the third quarter. "Domestic demand grew by more than 2% due to strength in consumer and government spending, even as housing markets remained weak," Macklem said.
The combination of international conflict and domestic economic factors is creating a challenging environment for Canadian homeowners and prospective buyers alike. With mortgage rates responding to global oil price fluctuations and housing markets showing regional weaknesses, the ripple effects from Middle Eastern tensions are being felt across Canadian communities.
