The Iran conflict could spark a deep downturn for the global economy, the IMF says – with big consequences for the Canadian housing outlook
The outbreak of the US-Iran war in February had already cast the outlook for Canada’s 2026 housing market into doubt – and things could be about to get a lot cloudier after a grim International Monetary Fund (IMF) warning about the potential global economic impact of a lengthy conflict.
On Tuesday, the IMF said the war could trigger an “energy crisis of an unprecedented scale” if it drags on, likely plunging the global economy into recession and worsening the economic uncertainty that’s hovered around the Canadian housing market since last year.
The organization slashed its outlook for global growth and said inflation would likely jump again if the war continued. Even a short-lived conflict, it said, would mean higher inflation and lower growth than first expected.
That means a potential further complication for a Canadian economy already reeling from the uncertainty around the continuing trade dispute with the US. For potential homebuyers, meanwhile, it adds an extra layer of unease as they grapple with the question of whether to make a big purchase with a potential sharp economic downturn and fears of job losses in store.
Could a worsening economic picture spur the BoC into rate cuts?
It remains to be seen how the Bank of Canada would respond to a substantial weakening in the national economy in the months ahead.
Top economists have pared back their expectations for interest rate cuts in 2026, with some speculation even arising around potential hikes between now and the end of the year because of soaring energy prices and inflation risks.
For now, the central bank is still in a holding pattern as it weighs up how inflation and the labour market are faring amid continuing economic volatility – but if it ultimately decides rate cuts are needed to strengthen a flagging economy, that could actually prove a net positive for Canadian housing, according to Toronto mortgage broker Drew Donaldson (pictured below).
He told Canadian Mortgage Professional that a lower central bank rate and the possibility of lower bond yields – which would likely move fixed mortgage rates lower – if the global economy weakens could improve the picture for those Canadians who have job security and are in a position to buy.
But much will depend, he added, on how long the war continues, whether the economy can bounce back quickly, and how many Canadians’ jobs would be placed at risk by a downturn.
“A global recession, if [the war] is very short – which I think is the US’s plan here – would drive interest rates lower,” Donaldson said. “It may actually end up helping the Canadian housing market. Is there a lot of doom and gloom out there? Absolutely. Is there a lot of uncertainty with the Iran war? There has been.
“But if you really look closely and trust the process, I’m thinking the second half of this year will be much more positive. The economy will be in better shape, rates will probably be lower finally, and hopefully the Iran war and maybe the Ukraine war are things of the past.”
It’s currently unclear how far apart the US and Iran are on a deal to bring the war to an end. A ceasefire was revealed last week, but tensions have flared again this week despite US president Donald Trump’s claim that Iran is open to negotiating a more permanent truce.
Rate uncertainty likely to strengthen as war rumbles on
Plenty of mortgage borrowers and potential homebuyers rushed to lock in a rate as bond yields shot upwards at the beginning of the war, sending fixed rates sharply higher.
There’s no easy answer on the approach borrowers should take in the current uncertain climate, although Donaldson said he’s still largely advising clients against locking in a fixed mortgage rate at their current levels.
“When fixed rates jump 50 or 75 basis points, it’s typically not the best time to lock into a fixed rate at that point,” he said. “Just wait for things to settle. Give it a couple of months and then if you want to go fixed rate, let’s go fixed rate by the summer or fall.
“But don’t just have a knee-jerk reaction and try to pay 50 or 75 basis points higher than you would have paid three weeks ago. That’s my advice to people with the uncertainty in the world right now.”
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