Canada’s housing market hadn’t exactly been blazing a trail in the early weeks of 2026, but the eruption of conflict in the Middle East since the end of February only looks likely to keep activity muted.
That’s because the market is being hit with a “double whammy,” according to Bank of Montreal (BMO) chief economist Doug Porter (pictured top): potential price squeezes at the pump and a likely runup in interest rates as five-year Government of Canada yields climb.
“It’s not good. On the one side, there’s the hit to confidence because of the uncertainty for the outlook and the very real hit to people’s pocketbooks from higher gasoline prices,” he told Canadian Mortgage Professional.
“At the same time, we’ve had this backup in long-term bond yields, which is threatening to push up longer-term mortgage rates. It’s tough for the housing market on both fronts.”
Porter was speaking shortly after the central bank revealed its decision to hold its policy rate steady in March, keeping that trendsetting interest rate at 2.25% amid concern about a possible inflation flareup from the war.
While financial markets see the central bank potentially hiking in the months ahead, Porter views cuts as the better option for the Bank – even if he says a prolonged rate hold between now and the end of the year is likelier.
A rate cut? ‘It doesn’t seem like they have a lot of appetite for it’
If the economy continues to weaken and Bank decisionmakers pivot towards a cut, could reduced rates provide a shot in the arm to the housing outlook?
In previous tough economic situations such as the 2007-08 global financial crisis and the COVID-19 pandemic, significant Bank of Canada rate cuts eventually stabilized and improved housing market activity, Porter pointed out.
But mortgage professionals and shoppers shouldn’t count on big downward moves by the Bank in the coming months.
“I still think every basis point matters for the housing market, whatever the economic backdrop is,” Porter said. “Having said all this, I think the chances of the Bank cutting are pretty low.
“It doesn’t seem like they have a lot of appetite for it, and the market is leaning very heavily against that.”
Aside from concerns around the economic impact of the war in Iran, a number of other factors are keeping homebuyers on the sidelines – not least growing signs of a weaker than anticipated economy and continuing concerns over the trade outlook as review of the US-Mexico-Canada Agreement (USMCA) looms.
The economy has unexpectedly shed tens of thousands of jobs, Statistics Canada revealed last week, as the unemployment rate also ticked higher.
Meanwhile, the North American trade review – which will arrive by the summer against the backdrop of continuing trade turmoil between the US and Canada – has been flagged as a potential gamechanger for the housing outlook.
A sliver of good news arrived on Monday with the announcement that the annual consumer price index (CPI) slid to 1.8% in February, a bigger fall than most economists had expected, although it remains to be seen how oil price fluctuations and geopolitical tensions impact that gauge looking ahead.
Interest rates likely to hold steady – or increase – in 2026
For now, the Bank of Canada and its governor Tiff Macklem struck a measured tone on both the inflation outlook and labour market in their remarks after Wednesday’s rate decision.
“The economy was weaker than they expected going into the conflict, and inflation was, if anything, slightly better than expected,” Porter said. “They didn’t really say that, but I think it was.”
Other top economists have echoed Porter’s view that the policy rate will likely remain on hold for the rest of 2026, even though financial markets are leaning more strongly towards a rate hike.
“Amid a fluid and constantly evolving situation, we expect the BoC to remain prudent, maintaining the overnight rate at 2.25% while awaiting additional clarity,” Royal Bank of Canada (RBC) senior economist Claire Fan wrote after the decision.
And Oxford Economics’ senior Canada economist Michael Davenport sees the central bank holding steady. “The Bank has been clear in the past that it doesn’t think monetary policy can effectively deal with adverse supply shocks,” he said.
“With the economy still in excess supply and signs of a deteriorating labour market, we think the BoC will likely wait out the storm and hold the overnight interest rate steady in slightly stimulative territory at 2.25% for all of 2026.”
CMP
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