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However,
when the newly inaugurated US president began to threaten Canada with
25% tariffs at the end of January, home sales slowed markedly. However,
challenges such as global market volatility and inflationary pressures
could temper this growth.
The
Bank of Canada will maintain its current monetary policy stance,
carefully balancing interest rates to manage inflation while supporting
economic activity. The housing market remains a key area of focus, with
efforts to address affordability and supply constraints continuing to be
critical. Immigration is slated to slow this year, particularly for
non-permanent residents, which will ease the housing shortage. Rents
have fallen sharply in recent months.
Rising costs, labour shortages, and potential import tariffs on building materials could hinder construction activity.
Tariff
threats are real and unnerving. Exports account for roughly a third of
Canadian economic activity. Canada sends 75% of its exports to the US,
led by energy, automobiles, and metals. Threatened attacks on these
trade flows might initially spill into higher prices. Still, the primary
impact would be to slow economic activity and increase unemployment,
already at 6.6%, up from a cycle low of 4.8% in July 2022. In contrast,
the US jobless rate is a mere 4.0% and GDP growth is a lot stronger than
in Canada despite double the central bank rate cuts than south of the
border.
In
the event of a trade war, interest rates are more likely to fall as the
BoC attempts to backstop the economy. This would decrease mortgage
rates, with floating rates falling more than fixed-rate loans. About 1.2
million mortgages will renew this year, most of them at a higher rate,
said real estate company Royal LePage in a report out this morning.
Almost
30% of those homeowners said they would choose a variable rate on
renewal, up from 24% now on a floating rate. Sixty-six percent said they
would renew on a fixed-rate loan, down from 75% now locked in.
Of
those who expect their monthly mortgage payment to rise upon renewal
this year, 81% said the increase would put a financial strain on their
household.
There
remains a good chance that Canada could avert a trade war. We’ve
already taken action to tighten our border. The US could not easily
replace the oil, hydroelectricity power, autos or aluminum it purchases
from Canada. We are the largest export market for US products. Excluding
oil exports, the US has a trade surplus with Canada. Revisions to the
US, Canada, and Mexico trade deal, slated for next year, could be
accelerated. The US has much bigger fish to fry than trade concerns with
Canada.
On
balance, interest rates are likely to fall further. Government actions
to improve housing affordability and pent-up housing demand bode well
for a housing revival this year. Canadian inflation is under control at
about 2%, boosting the chances of additional rate cuts this year. | 
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