Canada inflation cools as Iran war clouds next BoC move

Canada’s inflation downshift in February landed at exactly the moment policymakers least wanted a surprise.

Annual CPI eased to 1.8%, undercutting economist expectations of 1.9% and moving below the Bank of Canada’s 2% target just as the Iran war pushed global oil prices sharply higher.

The data, shaped by base‑year effects from last year’s GST/HST holiday, effectively bought the Bank time at its next decision, even as the Middle East conflict threatened to drive energy costs – and headline inflation – back up in the months ahead.

Tame core gave BoC room to wait

Economists stressed that the softness in underlying inflation, rather than the headline print alone, matters most for Wednesday’s rate call.

Core measures CPI‑median and CPI‑trim both slipped to 2.3%, while CPI excluding food and energy edged down to 2.0%.

“The tame report will be welcomed by policymakers ahead of the energy price shock, as it shows that labour market slack is keeping a lid on core prices, with the issue for the BoC being how long the oil price shock lasts for and its magnitude,“ CIBC economist Katherine Judge wrote.

Claire Fan, senior economist at RBC, said, "At this week’s meeting, we expect the BoC to recognize growing external uncertainty but continue to hold the overnight rate at its current, borderline accommodative level of 2.25%."

BMO chief economist Douglas Porter wrote that “the Bank should be considering cutting rates, not raising them, in this economic backdrop.“

He added that “with most measures of core inflation close to the Bank's two per cent target, policymakers can more readily look through the oil-driven spike that is surely coming to headline inflation in the next few months,” pointing to weak recent jobs data and uncertainty around the Canada–U.S.–Mexico Agreement.

Desjardins economist Royce Mendes said the “weak” inflation print would allow the central bank to “leave rates unchanged until well into 2027.” 

The C.D. Howe Institute’s Monetary Policy Council urged the Bank to keep its overnight rate at 2.25% for the next 12 months, underscoring how fragile the outlook remains for growth, inflation and housing – and how little rate relief mortgage borrowers are likely to see in the near term.

Oil shock from Iran war looms over benign print

The Iran war and effective closure of the Strait of Hormuz has pushed Brent and US crude back toward or above US$90–$100 per barrel, with analysts warning of renewed global inflation pressure as higher fuel and shipping costs worked through supply chains.

Those dynamics are especially sensitive for Canada. The Bank recently reaffirmed its 2.25% policy rate, signalling a “steady‑as‑she‑goes” stance as inflation hovered near target. A sustained oil spike could force policymakers to weigh imported energy inflation against an already muted housing cycle.

TD Economics struck a similar tone. “Canada's inflation cooled in February, but that is backward looking now that prices at the pump have skyrocketed in the wake of the U.S./Israeli war with Iran,” Leslie Preston, managing director and senior economist said.

“We expect higher energy costs will lift headline inflation close to 3% in the months ahead, but the effect on the Bank of Canada's core measures should be more modest... The Bank of Canada's interest rate decision is coming up on Wednesday, and the Bank is universally expected to remain on pause.”

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Housing starts edge up, but deeper strains unsettle builders

Canadian housing starts posted a modest rebound in February, but economists and industry data pointed to a market still losing momentum beneath the surface.

The latest figures suggest builders are working through earlier project decisions while facing weaker demand, higher costs and a darker macro outlook.

Canada Mortgage and Housing Corporation (CMHC) reported that the seasonally adjusted annual rate of housing starts rose 4.5% month over month to 250,900 units in February. That's up from a revised 240,148 in January.

The six‑month trend – a moving average used to smooth volatility – inched up just 0.4% to 256,005 units, essentially flat.

Actual starts in centres with populations of 10,000 or more were up 10% year over year, with 15,886 units in February and a 5% gain year‑to‑date.

“In February, the six‑month trend in housing starts was essentially flat, indicating that the trend in new construction activity remains relatively steady despite ongoing monthly volatility,” said Kevin Hughes, CMHC’s deputy chief economist.

“Looking ahead, we expect heightened levels of business uncertainty and construction costs to weigh on the rate and trend of housing starts in the near‑to‑medium term.”

Trend stayed strong but momentum cooled

Economists underlined that February’s gain followed a sharp pullback. “The bounce‑back was tepid. So far in the first quarter, starts are down about 4% compared to their Q4 level, boosting the risk that starts act as a drag on residential investment in Q1 GDP growth,” Rishi Sondhi, economist at TD Economics, said.

Sondhi said the increase has been concentrated in the multi‑family sector, with urban multi‑family starts up 8% month over month to 192,300 units, while urban single‑detached starts fell 8% to 38,200 units.

He said the broader trend in starts have “generally [been] cooling since September of last year” and would likely keep easing amid “weak population growth, high costs, elevated levels of unsold inventories, and very weak pre‑sales activity in key markets like the GTA.”

While February’s numbers kept construction running at a historically solid level, leading indicators pointed in the opposite direction.

CMHC defined a housing start as the point when the footing of a foundation was poured. According to CIBC Capital Markets, that definition meant the data reflected project decisions made 12 to 18 months earlier. As a result, housing starts were a lagging indicator of overall market health.

Regional picture remained sharply divided

CMHC data showed an uneven landscape. Among Canada’s three largest centres, Montreal posted an 18% year‑over‑year increase in actual starts in February, and Vancouver recorded a 60% jump. Both were driven by stronger multi‑unit and single‑detached activity.

Toronto, by contrast, saw a 28% decline as both segments pulled back. Rural starts were estimated at an annualized 20,400 units.

TD Economics said February’s gains were led by Quebec and the Prairie provinces, with notable strength in Manitoba and Saskatchewan.

Starts in British Columbia dropped and remained flat at a low level in Ontario, reinforcing concerns raised in earlier TD work that the recovery in homebuilding and sales would be “gradual” and constrained by “elevated economic uncertainty, a subdued job market and a leveling off in interest rates.”

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BC home sales skid again

British Columbia’s housing market stayed in a deep trough in February, leaving mortgage professionals grappling with thinner pipelines even as borrowing conditions eased from the peak‑rate era.

The British Columbia Real Estate Association (BCREA) reported 4,516 residential sales through MLS systems in February 2026. That's down 9.7% from a year earlier and roughly one‑third below the 10‑year February average of 6,532 transactions.

Average prices also slipped, with the provincial MLS figure falling 2.9% year over year to $932,243.

Regionally, weakness had few exceptions. Greater Vancouver posted 1,648 sales, down 8.8% on the year, while Fraser Valley transactions fell 7.6% to 785.

Chilliwack and Kootenay saw sharper slowdowns, with sales drops of 31% and 29.4% respectively.

Only a handful of boards – notably Victoria and BC Northern – recorded price gains, even there alongside double‑digit declines in unit sales.

“Housing market activity continues to struggle, with sales declining from every region in the province compared to the same time last year,” BCREA chief economist Brendon Ogmundson said.

“We hope that improved affordability conditions in most regions and stable rates will motivate prospective demand to enter the market and drive stronger sales activity over the rest of the year.”

Year to date, residential dollar volume across BC was down 17.8% to $7.3 billion, with unit sales 15.8% lower at 7,832 and the average price 2.4% below a year earlier, BCREA said.

The latest figures arrived just months after BCREA’s third‑quarter forecast painted a brighter picture for 2026.

At the time, Ogmundson said “trade‑related uncertainty upended hopes for a more normal market through the first half of 2025,” but projected MLS sales would increase by 10.7% to 80,600 units in 2026 as activity returned toward long‑run norms. 

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Is Canada's mortgage renewal crisis settling down?

For much of the past three years, Canada’s so‑called mortgage renewal cliff has loomed as a systemic risk. Now a new TD Economics report by Maria Solovieva, CFA, argued that the worst of that shock appeared to have passed, and that the drag on consumer spending from soaring payments started to ease.

Debt service pressures started to ease

According to TD’s internal data, households were devoting a smaller share of income to servicing debt than a year earlier, with the debt service ratio below its 2023 peak.

“The most telling sign that Canadian households have weathered the renewal shock is also the simplest: they are spending less of their income on debt,” Solovieva said.

She said two forces did the heavy lifting: faster‑than‑expected growth in personal disposable income and longer amortizations, which were roughly 16 months longer than before the pandemic. That combination “turned a mortgage ‘cliff’ into a much gentler ‘hill’,” she said.

The structure of the mortgage market also shifted. By 2026, about 73% of outstanding mortgages were either variable‑rate or short‑term fixed, compared with 55% in early 2022. That meant a larger share of the stock reacted quickly as rates fell.

“Recent interest rate cuts should pass through to borrowers more quickly than rate hikes did during the tightening cycle,” Solovieva said.

From cliff to rolling hill of renewals

The report’s conclusion echoes the Bank of Canada’s own work. The central bank estimated that while roughly 60% of mortgages would renew in 2025–26, “we do not expect upcoming mortgage renewals will lead to a severe worsening of financial stress,” provided incomes continue to rise and rates stay below borrowers’ stress‑test levels.

TD’s modelling showed average mortgage payment increases moderating to about 6% in 2026, with a median change near zero as more borrowers roll into lower rates.

The national debt service ratio is expected to edge higher in late 2026, but mainly because of new mortgages attached to higher home prices, rather than renewed pandemic‑era loans.

Mortgage interest costs in the CPI already decelerated sharply, with mortgage interest cost inflation running about 1.2% year‑over‑year in January 2026, down from a peak above 30% in 2023 – a lagging sign of easing pressure.

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Canadians confront complex affordability picture in a turbulent market

Affordability has proven an enormous problem in Canada’s housing market in recent years, whether for first-time homebuyers attempting to purchase a property or plenty of homeowners struggling with a jump in monthly mortgage payments.

With 2026 already underway – and a deep correction at play across many cities’ housing markets, particularly in the condo sector – has that picture improved yet this year?

In January, affordability improved in 12 of 13 major Canadian housing markets, according to Ratehub, although the highest drop in average monthly mortgage payments was still just $100, in Vancouver.

And falling house prices have been a double-edged sword: while lower valuations can present challenges for existing homeowners upon mortgage renewal time, they’ve also opened doors for some first-time buyers who were previously frozen out of the market.

Lenders’ Choice Mortgages broker owner Mike Kazarian told Canadian Mortgage Professional he was starting to see more first-time buyers seeking preapprovals to enter the market in the Greater Toronto Area (GTA).

Those individuals, he said, are taking a flexible approach to their search. “Some people are looking for condos, but people seem to want something a little bigger and they’re willing to go outside of Toronto – whether it be Milton, Burlington, or just outside the GTA,” he said. “It all depends on their expectation.

“If their expectation is that they’re going to qualify for an $800,000 purchase and they only really qualify for a $650,000 purchase, then that’s where the numbers lie. So it’s about creating realistic expectations.”

Homeowners confront headwinds as property values slide

Waning home prices may be good news for hopeful buyers, but they can prove problematic when homeowners renew their mortgage – especially at significantly higher rates than they likely secured five years ago.

That shock means mortgage holders are turning to options including refinancing and extended amortizations to meet their cashflow needs – but in some cases their hands are tied because their property value has declined.

“Their property value may not support the loan-to-value requirements of the lender,” Kazarian said. “For example: you purchased a home for $1 million five years ago and you have an $800,000 mortgage, so 80% loan-to-value. It’s a conventional mortgage.

“But now this property appraises at $900,000 so you can’t switch lenders. You’re held to the lender that you currently have and they may not have competitive rates. I’m also seeing a lot of people who had two family incomes and now they’re down to one income, so they’re not going to qualify for a mortgage either.”

Those challenges are pushing some homeowners back into the rental market because the burden of handling a mortgage is simply too much stress, Kazarian said.

Geopolitical strife continues to weigh down market

Global trade tensions and economic uncertainty poured cold water over hopes of a Canadian housing market rebound in 2025 after a quiet couple of years, and plenty of that unease has stretched into this year.

Kazarian doesn’t see a protracted meltdown in the housing and mortgage sectors, although it’s unclear when the light at the end of the tunnel will arrive for struggling homeowners.

“The reality of it is that real estate always ends up going up. Right now is just a blip,” he said. “We know that inventories are going to be low because there’s not much construction going on.

“So people need to be able to hold on. But is that two, three, four years out? We don’t know.”

And the fact that more first-time buyers are able to afford a property as prices fall means pent-up demand will probably keep a floor under the market, he added.

“I think the resale market should increase. There’s a lot of buyers sitting on the sidelines right now,” Kazarian said. “I’ve had a lot of first-time homebuyers reach out to me, so I think the market is going to pick up.

“As to where prices are going to go – have we hit a bottom yet? Nobody knows. But I think resale prices are going to pick up in the second half of 2026.”

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We hope you are finding our Blog informative and enjoyable to read while keeping you up to date with the ever changing real estate market. 

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