Rates are falling – but that news is overshadowed by mounting economic uncertainty
It’s five years to the month since COVID-19 arrived in Canada, triggering one of the most seismic economic crises in the country’s history as widespread public health measures took effect, business shuttered their doors and mass layoffs gathered pace.
The Bank of Canada slashed interest rates in response to that shock, with plunging borrowing costs eventually helping spur a rip-roaring housing market after Canadians had adjusted to the so-called “new normal.”
The pandemic may have faded into memory – but five years on Canada is grappling with another crisis, the beginning of a trade war with the US sparked by Donald Trump’s decision to slap huge tariffs on Canadian imports.
Interest rates are moving downwards in response, but the mortgage community isn’t expecting a repeat of anything like the COVID-era housing market boom.
That’s not only because rates almost certainly won’t fall to the rock-bottom lows seen during the pandemic, but equally because the unpredictability of the Trump administration and trepidation about the economic outlook are giving potential buyers cold feet.
Concern about employment and the direction of the economy is cancelling out optimism over lower rates, according to RATESDOTCA mortgage expert Victor Tran (pictured top). “The tariffs have a huge impact on the housing market and everything else in general,” he told Canadian Mortgage Professional.
BoC Governor Tiff Macklem made it clear that the BoC would "proceed carefully with any further changes" to rates.https://t.co/9lEx4tek3d
— Canadian Mortgage Professional Magazine (@CMPmagazine) March 13, 2025
“Sure, the rate will continue to drop. We’ve seen that already. Some lenders are offering a five-year fixed in the 3.99% range. But again, it’s still not enough to really instil confidence in buyers to enter the market. And of course, with the tariffs being around, job losses are a huge concern as well.”
Construction, housing costs set to spiral upwards in trade war
There’s another knock-on effect of tariffs to Canada’s housing market: the fact that costs typically climb and inflation usually rises in a trade war, meaning already strapped would-be buyers are now potentially facing even higher prices on housing.
“Appliances and furniture, everything required to build a house is going to cost more,” Tran said. “Throughout the process and in completing this transaction, the costs are just adding up – and people are afraid of that.”
While there was some optimism earlier in the year about prospects of a brisk spring market, that confidence appears to have dwindled as Canada gears up for what could be a punishing trade war.
Bank of Canada governor Tiff Macklem was frank about the potential economic damage the “crisis” could cause in comments after last week’s decision to trim rates by 25 basis points.
And other observers, including the former central bank governor Stephen Poloz, have sounded the alarm on how vulnerable Canada’s economy could be to the shock of a lasting trade war with the US.
Toronto’s condo crisis continues to rumble on
In Toronto, the slumping condo market is also dissuading many people who may have been weighing up a move.
“Over 65% of the inventory that’s out in the market right now are condos and they’re taking a massive beating,” Tran said. “There are a lot of new builds coming this year and next year as well.
“A lot of first-time buyers usually purchase condos as their starter home and a lot of people don’t have the 20% down, so they have to get an insured mortgage and it’s scary to put the bare minimum downpayment, for example, and potentially be in negative equity in a couple of months.”
Putting 5% down on a $500,000 condo, for instance, produces a mortgage size of $475,000 – but that jumps to $494,000 as a starting mortgage balance when the Canada Mortgage and Housing Corporation (CMHC) premium is added, spiking the loan to value to a hefty 98%.
“If there’s another drop of 1% or 2% on the condo prices or average prices, then you’re basically in negative equity,” Tran said. “If someone loses their job and they need to sell, they’re underwater already. Where are they going to come up with the money to cover the difference to pay off the bank?”
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