Trump's tariffs are putting downward pressure on rates, but buyers still appear cautious amid economic gloom
Mortgage rates are slipping in Canada and could still have some way to travel before the year is out – but a huge flood of buyers back to housing markets across the country still seems a distant prospect at present.
That’s due in large part to the ongoing tariff chaos with the US, a trade war that’s cast huge uncertainty over the outlook for Canada’s economy and its ability to absorb the shock of huge surcharges on Canadian goods crossing the border southwards.
The national housing market failed to heat up at the beginning of the year, with home sales sliding 3.3% across the country in January and listings jumping compared with the end of 2024.
And while there appears little chance of a housing market meltdown this year, the ongoing trade tussle with the US looks set to heavily influence its performance in the coming months.
That chill is hardly unexpected, according to Bank of Montreal (BMO) chief economist Doug Porter (pictured top), against the backdrop of gathering economic storm clouds.
“When you think about it, a buyer is making one of the biggest financial decisions of their life,” Porter told Canadian Mortgage Professional. “And it’s not at all surprising that suddenly they’ve turned cautious with the deep uncertainty we’re seeing around the economic outlook.
“Hopefully, that uncertainty will somewhat dissipate in the months ahead and then I think the lower interest rates could start to play a bigger role. But we’re also expecting much weaker growth and weaker employment markets, which will act as a big offset to lower interest rates.”
As a mainly domestic industry in Canada, housing remains one of the sectors least directly affected by a trade war – but it’s not completely immune, Porter said, because a big hit to employment would likely have significant spillover effects on the homebuying front.
The Bank of Canada has cut its benchmark interest rate by another 25 basis points, making a seventh straight reduction as the Canadian economy gears up for the potential seismic shock of a trade war with the United States. https://t.co/pBNdLGHHE6
— Canadian Mortgage Professional Magazine (@CMPmagazine) March 12, 2025
‘Interest rates are the biggest driver of the housing market’
The Bank of Canada’s decision to trim its benchmark rate to 2.75% on Wednesday seems unlikely to be its last rate reduction of the year, with Governor Tiff Macklem describing the ongoing trade war as a “crisis” and major banks predicting further cuts in the coming months.
That language marked a throwback to the days of the COVID-19 pandemic, when the central bank slashed rates to rock-bottom lows as the economy shuddered to a halt five years ago.
Then, the housing market rebounded from an initial steep decline to emerge as the strongest part of the Canadian economy predominantly because of those lower rates, even though unemployment spiked.
The current crisis isn’t exactly comparable, Porter said, because of the massive income support for households provided by the government during the COVID crisis. “But I think it’s still an important lesson that interest rates are ultimately the biggest driver of the housing market,” he said.
“And if the net result we get here is a weaker economy but also lower interest rates, I think that’s a bit of a wash for the housing market. We still think housing will hold up better than most other sectors. But even it’s not immune to the uncertainty and I think over the near term, it’s probably going to be a pretty chilly spring because of that.”
Inflation a key priority – but rate cuts still in the cards
The Bank put a strong focus on the inflation outlook in its Wednesday announcement, reiterating its commitment to the 2% target even despite a tariff war that could pummel the Canadian economy.
Its statement indicated that it would be “carefully assessing the timing and strength” of the downward impact on inflation caused by a weaker economy and the upward pressure impelled by higher costs.
While that language may have normally cast doubt on the prospect of more rate cuts before the end of the year, Macklem’s reference to a “crisis,” Porter said, was likely a telling indication of its willingness to bring rates lower.
“Typically, almost always, interest rates tend to come down during crises,” he said. “There are some inflation concerns here, but I think they’re going to get swamped by weakness in growth if this trade war persists.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
