Bank of Canada Rate Cut vs. Tariffs: Which Will Dictate the Spring Market?

Under normal circumstances — anyone remember what those feel like? — falling mortgage rates would be fuel for the spring housing market. But it’s hard to start a fire when the Canadian economy is soaked through with tariff-related fear and uncertainty.

The Bank of Canada is doing what it can to warm home buyers up. By lowering the overnight rate for the seventh consecutive time today, the Bank has helped slash 2.25% from variable mortgage rates since June 2024.

Once lenders absorb today’s cut, both five-year variable rates and the most common fixed rates will be available for below 4%.

Historically, those are approachable rates. But we’ll soon find out how little rates matter when home buyers face an unprecedented threat to their livelihoods.

Unsure buyers have resisted lower rates

In January, the Canadian Real Estate Association estimated that home sales would increase by 8.6% in 2025. That’s already looking like an overly optimistic projection.

In February, home sales in Toronto were down 27.4% compared to a year before. In Vancouver, they fell 11.7% year-over-year — and were almost 30% below the ten-year average for the month. Alberta experienced a double-digit decline in sales in February, too.

A brutal winter could be responsible for some of these declines, particularly in weather-walloped Toronto. But to see sales lose steam when mortgage rates are lower than they’ve been in years speaks more to sentiment than seasonality.

As good as it might feel to lock into a 3.9% fixed rate for the next few years, or take advantage of surging supply levels, it’s hard to commit to a mortgage if you think a tariff war with the United States could eliminate your job.

Analysis by Scotiabank estimates that a scenario in which 25% tariffs are implemented by both the U.S. and Canada could increase the national unemployment rate by 3% by the end of 2025.

Until the tariff threat subsides, it’s hard to imagine anyone employed in manufacturing, transportation, construction or food processing moving forward with a home purchase.

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Tariffs push up the cost of living

The cost of living is undoubtedly getting in the way of Canadians’ homeownership pursuits. In a recent poll conducted by RBC, 47% of Canadians said it was ‘not easy’ to think about their financial future while struggling to handle their day-to-day expenses.

That won’t change if the tariff spat with the U.S. drags on. The Canadian Chamber of Commerce estimates that 25% tariffs on Canadian goods would cost Canadian households an average of $1,900 annually. Reciprocal tariffs on American goods, which are already in place for over 1,200 products, could drive up costs for a slew of essentials, including food, clothes and toiletries.

And it’s not just consumers who will bear the brunt of these cost increases. Business owners will face higher input costs and must determine whether their margins can support them. Those who export may see significantly lower order volumes. All of this uncertainty makes it difficult for owners to invest in either their businesses or their personal portfolios, which include housing.

The Canadian government has vowed to keep its tariffs on U.S. products in place until those on Canadian goods have been removed. (Donald Trump’s repeated delays do not count.) If the cost of living is preventing certain home buyers from moving forward, they could be idling on the sidelines for months.

Shifting goalposts

Even if Canadians feel their jobs and income are secure, the chaotic nature of the tariff dispute might be enough to sap whatever home buying enthusiasm they’ve been able to muster.

The threat of tariffs has hung over Canada since before Trump was elected, and has grown only more pronounced since his inauguration in January. Canadians have already endured months of bluster, half-truths and a whiplash-inducing series of announcements and pauses.

It’s exhausting, and it makes planning for the future even more stressful than usual. If becoming a homeowner means being at the mercy of Trump’s whims, who could blame anyone for taking a breather?

Final thought

The Bank of Canada has received very little mention here, largely due to the fact that it has no control over the U.S.-Canada trade relationship. Today’s overnight rate cut is really a defensive measure; the Bank is trying to mitigate some of the damage tariffs might inflict on the economy.

Most Canadian consumers, including prospective home buyers, are in a similar position to the BoC in that we don’t have much influence over what’s coming. We can’t fully protect our finances from a trade war. Prices will spike, jobs will be lost and we’ll be left to pick up the pieces.

This could all change tomorrow, of course. Trump, tired of gnawing this particular bone, might drop it and sniff out some other headline-grabbing controversy. The cloud of tariffs could dissipate, leaving clear skies for home buyers.

But until tariffs are dead and buried, it’ll be all those “mights” “coulds” and “what-ifs” that keep a lid on the market.