The grinding fall

Remember where you were doing in 2013?

Maybe listening to US pop star Katy Perry, whose track ‘Roar’ was racing up the charts. Could you have imagined then that the young Canadian Liberal leader with nice hair, a magazine-quality wife and adoring children would soon, in a landslide, become prime minister for a decade – after which he’d end up… with Katy Perry?

Totally weird.

Well, that was also the last time real estate was as cool as it just became. The latest inflation stats came out this morning and were startling. Yes, these are pre-war numbers, but the war will inevitably end (TACO, remember?). What we’re seeing in Canada is an economy apparently chilling fast. Days ago we heard about a big drop in job creation and hike in unemployment. Now we see an inflation rate which has plunged to just 1.8% – massively down from the post-pandemic surge of 8%.

And at the forefront is real estate. “The grinding fall in home prices is weighing on shelter costs—the broad “owned accommodation” measure has eased to just 0.8% y/y, the coolest pace since 2013,” says economist Doug Porter. “Even rents have finally begun to reflect the weakness in market rents… less than half the pace of just two years ago.”

The Bank of Canada reviews its key rate on Wednesday, and it won’t move. In fact most economists think the CB will stay on the sidelines all year. If the economy continues to wobble, rate cuts might be warranted. But at the same time, everybody seems to think inflation will soon be surging (thanks, Mr. President), which would normally call for an increase or two. So the consensus view is the cost of borrowing will stay exactly where it is. Mortgages hovering around 4%, or less if TNL@TB likes you.

But wait.  Home loans could go up, even if the central bank turtles.

As stated, it looks like the Iran War – even if it were to end tomorrow (not happening) – will bring elevated energy costs for pretty much all of 2026. “While the before picture looked good,” warns CIBC, “the after picture of inflation following the start of the war could show headline inflation accelerating to roughly 3% y/y in the coming months.”

Economists at TD agree: “Inflation cooled in February, but that is backward looking now that prices at the pump have skyrocketed in the wake of the U.S./Israeli war with Iran. We expect higher energy costs will lift headline inflation close to 3% in the months ahead.”

Indeed. The sentiment is universal on Bay Street. Uppa, uppa.

“With the conflict in Iran beginning on the last day of February, this report has a distinct antebellum tinge—gasoline prices were still down 14% y/y last month,” adds BMO. “Those pump prices are poised to rocket as much as 15% m/m in next month’s release and will be well above year-ago levels, driving headline inflation towards 3% in coming months.”

So a surge from 1.8% to 3% is not something which Mr. Bond Market ignores. As inflation rises so do the demands by investors that they be protected from it. Bond prices go down and bond yields rise – something we’ve already been witnessing.

Before the bombs started falling the federal five-year bond yield sat around 2.6%. Now it’s 3%. In the wonderful world of government debt, that’s a big move – all in anticipation of what’s to come, as a result of what’s already happened. As we know, longer-term, five-year, fixed-rate mortgages (our fav) have interest costs that pace those bond yields. So while the Bank of Canada may be too much of a wuss to move, loan charges can (and probably will) swell.

Sigh. Nothing is simple any more. Now Trump wants China – his enemy – to send warships to protect tankers in the Strait of Hormuz because Iran is pissed at being bombed by Pete Hegseth and the Americans have already burned through their NATO allies. Besides, they need some boats left to take over Cuba next week.

The bottom line on the street seems clear, though. We hit the brakes. The year will stall, maybe even reverse. Cheaper houses, more expensive gas and job stress ahead.

Way more meow than roar.

About the picture: “We have had quite a few great cats during our fifty one years together,” writes Ted, in Calgary. “They are our comfort and joy. They give respite as we wonder what the hell is going to happen next to all of us and our B&D holdings. Our neighbour dog Jack shown here as he got older was a great friend for over ten years. I kept a box of Milk Bones by the door and with the permission of his people a few sailed over the fence. He was a true friend to us.  When they were away we fed and watered him and he would do the Snoopy dance and yelp of joy, he did not suffer strangers gladly until we said, its okay buddy!”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2026/03/16/the-grinding-fall/