Here's how a U.S. trade war could impact buying a home in Canada

Tariffs on Canadian goods may be delayed for now, but what does the looming threat of a trade war mean for homebuyers?

With economic uncertainty and a weakened loonie, one expert predicts Canada's housing market will likely slow even further. Victor Tran, a mortgage and real estate expert at Ratesdotca, said the situation might have homebuyers holding back on large debts, given a possible recession.

In an interview, Tran explained the potential effect of a trade war on homeowners and Canadians looking to purchase a home.

How would a trade war with the US affect the average Canadian's ability to buy a home?

"A trade war would likely change buyer sentiment. Buyers would likely become more cautious and reluctant to make major purchases such as a house during uncertain economic times.

If rates decrease, so will stress test and qualifying rates, which means purchasing and borrowing power will increase. Vice versa, if rates increase, stress test and qualifying rates will increase, which will reduce purchasing and borrowing power.

Lower rates equal lower monthly payments, and higher rates equal higher monthly payments. However, if rates are low, demand for housing could increase (as seen from March 2020 to March 2022), which would cause home prices to rise, offsetting any monthly savings due to low rates."

How does a strong vs. weak dollar impact the housing market? 

"It's hard to say definitively. However, there shouldn't be much of an impact on domestic buyers.

If the Canadian dollar is weak, it's a possibility that investors with stronger foreign currencies could try to invest in the Canadian housing market. We've seen this in the past, but that is not guaranteed to happen."

What does this situation mean for first-time buyers, and how can they protect themselves from negative equity? 

"An option is to put down a larger down payment to ensure the loan is substantially less than the market value of the home. However, it may not make sense to put the majority of a person's savings into a down payment just to avoid negative equity.

It's best to stay liquid during trying times. Other than that, not much can be done to protect home equity. The market ultimately dictates the price of homes."

What does this mean for homeowners looking to sell?

"It reduces the risk of financial loss if a homeowner sells and buys in the same market conditions, as the selling and buying prices would likely be similar.

If, for example, a homeowner sells in a down market and purchases in a high market, they would likely take a large financial hit, as the selling price would be low and the purchase price high. Selling in a high market and purchasing in a low market is ideal but very difficult to time."

What will some lasting effects on the housing market be if Canada goes into recession? Can you compare it to previous recessions?

"If Canada were to go into a recession, we would likely see low sales volume in the housing market for a prolonged period of time. Home prices would likely remain flat or gradually decline over time.

Buyer confidence would likely be low, and new home construction would likely decrease. The 1990s housing downturn in Canada would be an example of this."

How will this period of uncertainty affect renters and landlords?

"It depends on individual financial circumstances and the unemployment rate. If there are large-scale job losses, it could lead to a lower number of renters, which in turn could lead to landlords holding on to empty properties for extended periods of time, which could lead to financial strain."