How the Prolonged Iran Conflict is Impacting Global Housing Markets
When the Iran war started in February, the widespread belief was that its dampening impact on the Canadian housing market would be short-lived.
Five months and multiple peace attempts later, the war is still dragging on and economists and real estate experts are warning that the inflationary impact from the conflict could drag on for months and result in another stagnant year for Canadian housing.
The Iran war immediately affected the housing market, as bond yields skyrocketed and fixed mortgage rates, which usually track bond yields, increased by roughly 50 basis points. (There are 100 basis points in a percentage point.) At the same time, economic uncertainty from the war meant consumer confidence plummeted and would-be homebuyers held off making purchases.
If the war in Iran ended swiftly, gas prices and bond yields would have dropped to prewar levels quickly. But the months-long near-shutdown of the Strait of Hormuz has created a large backlog of oil shipments, and economists say it’ll now take a long time for prices to stabilize and inflation to ease, even after a peace deal is finalized and tankers start to transit freely again. Oil shipments have begun to move through the strait in fits and starts, and despite a ceasefire agreement, continuing tensions are raising questions over how crude prices may be affected.
“We’re still expecting to see higher energy prices than if there had never been conflict in Iran through the rest of this year and into next year,” said Kari Norman, a senior economist with Desjardins, who said that will lead to some inflationary impact spilling into other sectors.
Meanwhile, CIBC deputy chief economist Benjamin Tal said he doesn’t expect the Canada five-year bond yield (the biggest driver of fixed mortgage rates), to drop all the way to their pre-war levels. The bond yield was at roughly 2.7 per cent before the war, and was hovering around 3 per cent on Monday. It would likely only drop 15 basis points after a peace deal, he said.
Such a decrease in yields could bring little relief to long-term fixed mortgage rates, but Ms. Norman said rates will still be elevated at a higher level than before the war.
The Bank of Canada could also be forced to increase its policy rate if inflation persists, which would make variable-rate mortgage rates more expensive. Money markets, which capture investor expectations around central bank policy, are pricing in a 50/50 chance that there will be rate by the end of the year, according to Bloomberg data. Ms. Norman, meanwhile, said Desjardins expects no change to the rate in 2026.
However, CIBC’s Mr. Tal said he believes that consumers today aren’t being held back by rates. Instead, they’re more worried about their jobs and the state of Canada’s housing market, which has been in a downturn for several years now.
Real estate analysts first expected that 2026 would deliver modest gains in average sale prices and transactions, even in cities like Toronto and Vancouver, which have seen some of the sharpest valuation declines since the height of the pandemic.
Now, Coldwell Banker Canada chief executive officer Karim Kennedy says he expects that the year will end flat.
“The longer you have these moving geopolitical pieces, it definitely impacts the market,” Mr. Kennedy said.
Mr. Tal added that consumers are worried about the looming free-trade negotiations between the United States and Canada that are set to start in July. He expects that the negotiations will be “about six months of volatility.”
The uncertainty around the United States-Mexico-Canada Agreement will likely drive bond yields higher, Mr. Tal said.
However, Mr. Tal is hopeful that tariffs and economic pain will be relatively muted and limited to certain sectors like dairy, lumber and auto.
On Money Newsletter
Looking forward to 2027, Ms. Norman said she feels optimistic that the real estate market will notably improve.
“This feels like a real Goldilocks moment to me,” she said.
“Prices are reasonable relative to history, and mortgage rates are about as low as they’re going to go.”
Inventory has been rising and sales have been on a downward trend in Canada’s biggest property markets since 2022, when the Bank of Canada first started raising rates to battle inflation during the pandemic.
Mr. Kennedy said consumers can only wait so long until they decide they need to buy a home.
“At some point, if it’s the right house, right time and the balance sheet works for consumers, they’ll pull the trigger and make a deal,” he said.
This article was first reported by The Globe and Mail
