How the US-Iran ceasefire could impact Canada’s housing market

Canadian five-year government bond yields slid overnight on Tuesday amid news of a fortnight-long US-Iran ceasefire, raising hopes that fixed mortgage rates could be on the way down in the weeks ahead.

But that truce faced an uncertain future on Wednesday, wobbling yields as Israel’s attacks on Lebanon continued and Iran announced a halt to oil traffic through the Strait of Hormuz.

Wednesday’s volatility underscored just how brittle the ceasefire remains – and it’s far too early to assume the most damaging impacts of the conflict on global economies have been averted, according to a leading economist.

Charles St-Arnaud, chief economist at Servus Credit Union, told Canadian Mortgage Professional it was still unclear whether the picture would change meaningfully for the Bank of Canada or housing market watchers as a result of the ceasefire.

“The big uncertainty is: what happens in two weeks?” he said. “Does the ceasefire last two weeks? After two weeks, do we go back to where we were last week with still increased tensions and the Strait of Hormuz being closed, or are we returning to a more normalized kind of shipping traffic and normalizing energy prices?

“That’s where there might be a bit too much euphoria at the moment. I would caution that we still need to be quite careful. There’s still a lot of disruption and a lot of oil supply that hasn’t reached the market over the past 40 days.”

That means inflation expectations are still elevated, seemingly leaving little chance that the Bank of Canada will be in a position to cut interest rates anytime soon.

‘It’s only one day’: Too soon to predict a better outlook

And while lower yields might result in lower fixed rates, that’s by no means a given – particularly with no indication that the US and Iran could be close to striking a more lasting peace deal.

“It’s only one day,” St-Arnaud said, “and oil prices are still significantly higher than they were earlier this year or where they were last year. It’s the same with gasoline prices and the same with diesel prices. So that’s still continuing to impact the economy.

“I think the big question for the economy will be: When do we reach a point where we’re back to a normal situation? Let’s say the ceasefire stands and the Strait of Hormuz reopens and we have a normalization in the shipping lanes through the Strait. How long is it going to take to normalize the situation? Probably a good two, three months to re-equilibrate the system.”

War has already pummelled Canada’s housing market outlook

While real estate associations have struck a generally optimistic tone on the outlook for the housing market moving into the spring and before the end of the year, mortgage professionals have tempered their expectations with a dose of realism on the Iran war.

Consumer confidence has already plummeted to its lowest level for nearly a year because of the upward pressure the war has exerted on prices, according to the Bloomberg Nanos Canadian Consumer Confidence Index.

And the war’s outbreak at the end of February also seemed to pour cold water over many hopeful homebuyers’ purchasing plans, the latest in a series of calamities during a chaotic year for the market that’s seen tariff turmoil, economic uncertainty and now further geopolitical chaos to contend with.

It looks almost certain that gasoline prices will remain much higher than they were last year, St-Arnaud said, likely pushing headline inflation higher. But much will depend on whether other goods and services are also affected by supply chain snarls.

“Maybe inflation expectations will also normalize as households and businesses start to no longer expect the disruption to last longer, and say that ‘Well, we now know that the higher energy prices are not going to last more than maybe a year maximum,’” he said.

For the economy and housing market, then, that means the ceasefire is a positive news story – but not one that looks set to move the needle yet.

“It’s a nice relief – but it hasn’t lasted long enough yet,” St-Arnaud said. “It’s still unclear how sustainable the relief is.”

Source CMP
By Fergal McAlinden