Few economic shocks rattle family budgets more than rising borrowing costs. That’s one reason why wars that rocket oil prices are bad for Canadians’ pocketbooks, and the Israel–Iran conflict may be no exception.
Middle East Conflicts And How It May Affect Mortgage Rates
I never really thought we’d be having this kind of conversation, especially in connection with the Canadian real estate economy, but everything is somehow connected…
Surging oil prices usually drive up inflation. Above-target inflation is bad enough, but it also tends to either push up interest rates or, at a minimum, prevent them from falling.
A current or prospective homeowner watching the tragic fallout of the Israel–Iran war may also be wondering about something that hits closer to home: what does this mean for my mortgage rate?
To answer this type of question, we can look back in history, but this particular situation has few useful precedents.
The last major regime-changing war was in Iraq, after the U.S. invaded the country to oust Saddam Hussein in March 2003.
“Operation Iraqi Freedom,” as it was called, lasted just a few months. In the lead-up to it, however, West Texas Intermediate (WTI) oil futures surged as much as 61%, according to data from Bloomberg.
Amid the Iraq War, Canada’s benchmark prime rate rose a modest 50 basis points. But that wasn’t just an oil story; it was driven partly by economic momentum, which Canada is lacking today.
Curiously, despite an uptick in the prime rate, the Iraq War had little direct impact on the average five-year fixed rate. It stayed surprisingly flat.
The other major oil-related U.S. conflict was the Gulf War from August 1990 to February 1991. In this one, oil prices more than doubled at their peak.
Despite that, Canada’s prime rate fell 350 basis points by the time the war was over. The average five-year fixed rate dropped more than 260 basis points.
Mortgage market lessons
From a financing perspective, the Gulf War and Iraq War had three things in common:
- Oil prices vaulted higher
- Inflation ran hot for a while
- There were no major upside moves in mortgage rates
So, even with WTI crude jumping 27 per cent this month, odds are the market will look through this energy price spike. Iran faces an overwhelming force, particularly if the U.S. enters the conflict. Hence, this is not a war that’s expected to weigh on oil and inflation for years, or cause people to queue for gas in bell bottoms, à la 1973.
That said, short-term inflation jitters might goose bond yields — potentially nudging fixed mortgage rates somewhat higher.
For that to happen, Canada’s five-year government yield would have to punch above three per cent. Chart watchers say that’s a decent bet. So, if you’re mortgage hunting, keep one eye on the yield chart — and the other on your rate hold expiry.
As for variable rates, no forecasters are betting on hikes, given that the tariff-bruised economy continues to wobble. But a sustained surge in inflation could take rate cuts completely off the table for a while.
Roughly four out of five new home purchases are financed, and climbing mortgage rates dampen sentiment and borrowing power like rain on a housing parade.
That’s why oil spikes aren’t exactly welcome news for the housing sector in the near term. But it only becomes a real headache if war-fuelled inflation drags on for more than a matter of months. And what little precendent there is suggests that’s not a strong bet.
