On the heels of yesterday’s remarks by newly inaugurated U.S. President Donald Trump suggested that he might implement tariffs on Canadian imports as early as February 1st, the Canadian real estate market (and overall economy) could be facing significant headwinds.
Here’s what you need to know about how tariffs and their potential retaliation could impact the broader economy and, ultimately, the housing market.
The Tariff Threat and Canada’s Likely Response
Trump’s tariff threat isn’t just political rhetoric. Should these tariffs take effect, Canada is expected to retaliate with its own set of counter-tariffs on U.S. goods. Typically counter-tariffs are used to raise money to subsidize industries that may struggle the most with pending U.S. tariffs. In Canada’s case, those industries are likely automotive, agriculture and food, manufacturing, and energy:
According to sources cited by CTV News, the Canadian government has already drafted an initial retaliation plan that it could unveil soon after February 1st. While these moves may seem necessary to protect Canada’s industries, the economic consequences could be far-reaching.
The Economic Domino Effect
Tariffs—essentially taxes on imported goods—make products more expensive. If Canada retaliates, the cost of U.S. goods would rise, contributing to inflation. This is particularly significant because Canada imports a substantial volume of goods from the United States. Everything from groceries and machinery to vehicles and household items could see price hikes. For example, the U.S. accounts for roughly 50% of Canada’s imported goods, meaning tariffs on these items could sharply increase the cost of living for Canadians.
Inflation, already a major concern for central banks worldwide, could escalate exponentially in this scenario. Higher costs for goods lead to higher consumer prices across the board, which can create a self-perpetuating cycle of rising costs.
To combat runaway inflation, the Bank of Canada (BoC) may have no choice but to raise interest rates, even though it has been focused on fostering economic recovery through rate cuts in recent years.
A Potential Interest Rate Surge
Imagine a scenario where the Bank of Canada raises its policy rate by 300 basis points (bps), or 3%, to combat inflation. This would significantly impact Canadians, especially given the BoC’s recent trend of rate cuts aimed at fostering economic recovery. According to a report from Scotiabank Economics, a potential retaliation on tariffs from the Canadian government, can cause up to a 300bps (3%) increase in interest rates, a scary figure to imagine, especially as interest rates have been declining in recent months as inflation woes cooled.
For instance, if you have a variable-rate mortgage at 3%, a 300 bps increase could push your rate to 6%. On a $500,000 mortgage, monthly payments could jump from approximately $2,370 to $2,998. This kind of increase would strain household budgets, potentially leading to a spike in mortgage delinquencies and reduced housing demand.
Additionally, businesses relying on credit to fund operations or expansions would face higher borrowing costs, potentially leading to slower economic growth. For Canadian households, which already face record levels of debt, higher rates could exacerbate financial stress.
Are Canadian Banks Prepared?
Canada’s “Big Six” banks—Royal Bank of Canada, TD Bank, Scotiabank, BMO, CIBC, and National Bank—are known for their stability. However, even they might struggle under the weight of increased loan losses. Currently, the banks’ Allowance for Credit Losses (ACL) is 0.78% of loans. Analysts predict that tariff-driven economic turbulence could push loan losses above 1%.
For perspective, during the 2008 financial crisis, banks worldwide grappled with bad loans. While Canada’s banking system proved resilient then, the unique combination of tariffs, inflation, and rising interest rates could present a challenge unlike any before.
What Can Happen to the Real Estate Market in Canada?
Higher interest rates and economic uncertainty would likely dampen real estate activity. Homebuyers, already stretched by rising prices, may delay purchases or opt for smaller homes. Sellers, facing reduced demand, might be forced to lower asking prices. Investors could pull back, leading to a slowdown in new housing developments.
To understand the potential impact, it’s essential to consider the current state of the Canadian real estate market. According to the Canadian Real Estate Association (CREA), home sales were down 19% year-over-year in recent months, and prices have shown sluggish recovery following a period of significant cooling. In some major markets, such as Toronto and Vancouver, prices remain well below their 2022 peaks. Tariffs and their economic ripple effects could further stifle this slow recovery.
Construction activity, a critical component of the real estate market, could also take a hit. With rising costs for materials—much of which are imported from the U.S.—builders might delay or cancel projects. This would not only affect housing supply but also impact jobs in the construction sector, creating a broader economic drag.
The ripple effect wouldn’t stop there. Retail sectors tied to home furnishings and renovations, as well as local governments reliant on property taxes, could all feel the strain. For instance, reduced property transactions mean less revenue from land transfer taxes, potentially leading to budget shortfalls for municipalities.
Navigating the Storm
While the situation remains hypothetical, it’s crucial for Canadians to prepare. Potential strategies include:
- Homeowners and homebuyers: You could explore locking in a fixed-rate mortgage now to shield against future rate hikes.
- Investors: Diversify portfolios to mitigate risks associated with real estate.
Frequently Asked Questions (FAQ)
Q: What are tariffs, and how do they work?
A: Tariffs are taxes imposed on imported goods, making them more expensive for consumers and businesses. Governments use tariffs to protect domestic industries or as a response to trade disputes.
Q: How much does Canada import from the U.S.?
A: Canada imports roughly 50% of its goods from the U.S., including essential items like food, machinery, and vehicles. Tariffs on these imports could lead to significant price increases.
Q: Why would tariffs lead to higher interest rates?
A: Tariffs increase the cost of goods, driving up inflation. To control inflation, the Bank of Canada may raise interest rates, which makes borrowing more expensive and cools down the economy.
Q: How might tariffs affect Canadian households?
A: If Canada retaliates against US tariffs, households would face higher prices for goods and services. If interest rates rise, mortgage payments and other loans would become more expensive, putting additional financial pressure on families.
Q: What can homebuyers do to prepare?
A: Homebuyers can consider locking in fixed-rate mortgages now to shield themselves from potential future rate hikes.
Q: Are Canadian banks strong enough to handle the fallout?
A: While Canadian banks are well-capitalized, an economic downturn caused by tariffs and rising rates could increase loan losses. Analysts predict losses could exceed 1% of loans, which would strain even the largest banks.
Q: How will the real estate market be affected?
A: Higher interest rates and economic uncertainty could reduce housing demand, slow price recovery, and delay new construction projects, ultimately leading to a cooling real estate market.
Q: What Canadian industries will be hit hardest by tariffs?
A: Key industries likely to suffer include automotive, agriculture and food, manufacturing, and energy due to their reliance on cross-border trade and U.S. imports.
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