Have We Dodged A Tariff Bullet? Your Questions Answered…Sorta.
With all the news and social media bits pounding on us how the sky is falling or batten down the hatches, it is so difficult to understand what facts are true and how to react to it. President Trump’s threat of extreme tariffs has turned Canada & Mexico upside down, leading many to expect the worst. I panic bought a few litres of bourbon only to find out in the final minute a deal was struck to postpone the tariff war for another month.
So, did we dodge a bullet? The quick answer is, yes…for now. So, what should we expect for the near and foreseeable future? Below are real estate related questions I have been ask over the last 7 days:
Q: Are interest rates expected to fall even further?
A: On Jan 29th, for the sixth consecutive time, the Bank of Canada (BoC) reduced rates down to 3%. Several factors led to their decision, but the potential for a trade conflict triggered by new US tariffs on Canadian exports is a major uncertainty. This could be very disruptive to the Canadian economy and is clouding the economic outlook. The BoC has not eliminated the possibility of a further decrease come March 12. However, there are many “ifs & buts” to be considered till then. Keep in mind that it is popular belief, even before talks of tariff wars, that the BoC planned to stabilize the rate around 3% for years to come to maintain balance in the financial market.
Q: Do I lock into a 5-year fixed rate now?
A: I have always, and continue to, promote a “variable plan” that will shorten your mortgage payments and save tens, even hundreds of thousands of dollars in interest payments. It is not for the weak of heart and I am happy to explain in detail for the interested. For now, my answer to the question above is for those who are more comfortable with a guaranteed payment rate and peace of mind.
The fixed rate is closely tied to the bond yields and not the BoC prime rate changes. Over the last 5 days bond yields have been declining. They are expected to decline even more with threats of a recession in the horizon. In addition, the Bank of Canada’s reduction of the prime rate could possibly be short lived. If you are up for renewal soon, it would be wise to discuss in detail your circumstances with your lender. Should a recession occur, it would be an opportunity for that rare occasion that fixed term rate is more financially beneficial than the variable.
Q: How will a tariff war affect the real estate market?
A: Very difficult to say for sure. The single factor that effects real estate sales “volume” is consumer confidence. The factor that determines whether it is a buyer or seller’s market is supply & demand. How the government reacts to the tariff engagement and the policies they implement will affect how businesses adjust their operations, output or price. This in turn will affect employment and consumer confidence. For the majority, a tariff war will be a negative effect. However, it has been known for consumers to have a contrasting reaction to a crisis. During the pandemic we would have never anticipated a huge influx in volume and price. Remember that in every challenge there is an opportunity. It is a matter on how to seize it and who can help you get it.
Q: Will home prices go up or down?
A: Again, the answer varies pending how current events affect confidence, supply & demand. Prior to the roller coaster we’ve experienced the last week, an improvement in activity, demand & price for homes it was predicted by CMHC and other financial entities. If you are in the core of a major city, that may still be true as location is a leading factor of price. Another factor is what type of home…freehold, condo, detached, apartment, etc. Detached homes are continuously going up in price. Condos are expected to do the same, but that will depend on how much supply will be entering the market in spring.
Q: Which political party is best to address housing issues?
A: Personally, none of them can. Here is why. Just to scratch the surface CMHC reported that 3.5 million homes need to be built by 2030 on top of homes already scheduled to be built. That equates to 5.8 million homes in 6 years. That’s almost 1 million home starts a year. The most home starts in a year in Canada was 271,200 in 2021. The current govt attempted to promote 400k homes builds in 2023 only to fall short by 160k. Can you see the problem?
It is up to you to determine which party is genuine in addressing the following issues that directly affect affordability:
- Immigration – is the influx of immigrants a contribution or strain on our economy and therefore housing?
- Economic – are the policies implemented, and investments spent by the government producing a healthy rate of return on our GDP or causing a rise on inflation? Are interest rates on prime & fixed a healthy reflection of said policies?
- Cost of Building – whose policies promote a competitive and productive labour force? Are government zoning, regulations and infrastructure policies limiting or encouraging?
- Cost of Supplies – whose policies encourage an open and competitive market that keeps products affordable?
I personally place most of the blame on developers rather than the government. That is another article all together.
I hope this has been enlightening and helpful. If you have any questions, please feel free to reach out. I am at your service.