Canadian existing home sales plunged last month as tariff concerns moth-balled home buying intentions.

According to data released Monday by the Canadian Real Estate Association, transactions fell 9.8% from January. Activity was at its lowest level since November 2023. Benchmark home prices declined 0.8%, and new listings plunged, more than reversing January’s gains. Housing continues to struggle despite the dramatic easing by the Bank of Canada, which took overnight rates down from 5% in June 2024 to 2.75% today, its lowest level since September 2022.

Were it not for the US announcement on January 20 that it would impose 25% tariffs on Canadian and Mexican goods, housing markets would be headed into a strong Spring season. While we believe that rates will fall substantially further, a strong housing recovery awaits further clarity on the economic outlook. We have revised down our growth estimates for the first and second quarters of this year, raising the prospects for a recession.

The trade war with the US has sharply raised uncertainty. Labour markets are tightening, stocks have sold off sharply, and interest rates are falling. Tariffs will also boost inflation, causing the central bank to ease cautiously.

“The moment tariffs were first announced on January 20, a gap opened between home sales recorded this year and last. This trend continued to widen throughout February, leading to a significant, but hardly surprising, drop in monthly activity,” said Shaun Cathcart, CREA’s Senior Economist. “This is already reflected in renewed price softness, particularly in Ontario’s Greater Golden Horseshoe region.”

Declines were broad-based, with sales falling in about three-quarters of all local markets and in almost all large markets. The trend was most pronounced in the Greater Toronto Area and surrounding Great Golden Horseshoe regions.

New Listings

With sales down amid a surge in new supply, the national sales-to-new listings ratio fell to 49.3% compared to readings in the mid-to-high 50s in the fourth quarter of last year. The long-term average for the national sales-to-new listings ratio is 55%, with readings between 45% and 65% generally consistent with balanced housing market conditions.

At the end of January 2025, close to 136,000 properties were listed for sale on all Canadian MLS® Systems, up 12.7% from a year earlier but still below the long-term average of around 160,000 listings for that time of the year.

“While we continue to anticipate a more active spring for the housing sector, the threat of a trade war with our largest trading partner is a major dark cloud on the horizon,” said James Mabey, CREA Chair. “While uncertainty about the economy and jobs will no doubt keep some prospective buyers on the sidelines, a softer pricing environment alongside lower interest rates will be an opportunity for others.”

At the end of February 2025, 146,250 properties were listed for sale on all Canadian MLS® Systems, up 13.1% from a year earlier but still below the long-term average of around 174,000 listings for that time of the year.

“The uncertainty of the last few weeks seems to be causing some buyers to think twice about big financial decisions right now,” said James Mabey, CREA Chair. “A softer pricing environment and lower interest rates will be a buying opportunity for others.”

There were 4.2 months of inventory nationally at the end of January 2025, up from readings in the high threes in October, November, and December. The long-term average is five months of inventory. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months and a buyer’s market above 6.5 months.

Home Prices

The National Composite MLS® Home Price Index (HPI) declined by 0.8% from January to February 2025, marking the largest month-over-month decrease since December 2023.

The renewed price softening was most notable in Ontario’s Greater Golden Horseshoe region.

The non-seasonally adjusted National Composite MLS® HPI was down 1% compared to February 2024.

Bottom Line

Before the tariff threats emerged, the housing market seemed poised for a strong rebound as the spring selling season approached.

Unfortunately, the situation has only deteriorated, particularly as President Trump has repeatedly suggested that Canada could become the 51st state, further angering Canadians. While the first-round effect of tariffs is higher prices as importers attempt to pass off the higher costs to consumers, second-round effects slow economic activity reflecting layoffs and business and household belt-tightening.

The Bank of Canada will no doubt come to the rescue slashing interest rates further. This is particularly important for Canada where interest-rate sensitivity is far higher than in the US.

The Consumer Price Index (CPI) rose 2.6% year-over-year (y/y) in February, following an increase of 1.9% in January. With the federal tax break ending on February 15, the GST and HST were reapplied to eligible products. This put upward pressure on consumer prices for those items, as taxes paid by consumers are included in the CPI.

While the second straight acceleration in the headline number was expected, the pace of price gains may still surprise Bank of Canada policymakers, who cut interest rates for the seventh straight meeting. Donald Trump’s tariff threats hamper business and consumer spending. But assuming the federal sales tax break hadn’t been in place, Canadian inflation would have jumped even higher to 3% in February. This is at the upper bound of the bank’s target range, from 2.7% a month earlier. Canadian inflation has not been at or above 3% since the end of 2023.

Faster price growth was broad-based in February, the end of the goods and services tax (GST)/harmonized sales tax (HST) break through the month contributed notable upward pressure to prices for eligible products. Slower growth for gasoline prices (+5.1%) moderated the all-items CPI acceleration.

The CPI rose 1.1% m/m in February and 0.7% on a seasonally adjusted basis.  However, the increase exceeded the tax impact as seasonally-adjusted CPI excluding the tax impact was +0.4%. And, in case you want to pin it on food & energy, CPI excluding food, energy & taxes was +0.3%.

Gains were across the board, with the sectors impacted by the tax change seeing the most significant increase: recreation +3.4%, food +1.9%, clothing +1.6%, and alcohol +1.5% more to come next month, with the tax holiday only ending in mid-February. The headline inflation figures are subject to as much noise as we’ve seen in decades. They are poised to continue for at least another couple of months, making it very challenging to interpret the inflation data.

As a result, prices for food purchased from restaurants declined at a slower pace year over year in February (-1.4%) compared with January (-5.1%). Restaurant food prices contributed the most to the acceleration in the all-items CPI in February.

Similarly, on a yearly basis, alcoholic beverages purchased from stores declined 1.4% in February, following a 3.6% decline in January.

On a year-over-year basis, gasoline prices decelerated, with a 5.1% increase in February following an 8.6% gain in January. Prices rose less month over month in February 2025 compared with February 2024, when higher global crude oil prices pushed up gasoline prices, leading to slower year-over-year price growth in February 2025.

Month over month, gasoline prices rose 0.6% in February. This increase was primarily related to higher refining costs amid planned refinery maintenance across North America. This offset lower crude oil prices, mainly due to increased American supply and tariff threats, contributing to slowing global growth concerns.

One notable exception to the broad-based strength was shelter, rising “just” 0.2%. That’s the smallest gain in five months, trimming the yearly pace to 4.2%, the slowest since 2021, with more downside to come. Mortgage interest costs rose a modest 0.2% for a second straight month, slicing it to +9% y/y, ending a 2½-year run of double-digit increases.

Not surprisingly, the core inflation metrics were firm as well. CPI-Trim and Median both rose 0.3% m/m and 2.9% y/y. The 3- and 6-month annualized rates are all above 3% as well, pointing to ongoing stickiness. The breadth of inflation, which has been a focus for the Bank of Canada, also worsened with the share of items rising 3%+ increasing modestly. None of this is encouraging news for policymakers.

Bottom Line

This report will reinforce the Bank of Canada’s cautious stance on easing to mitigate the impact of tariffs. Notably, the upcoming end of the carbon tax will cause inflation to drop sharply in April. However, March may see an increase in inflation as the effects of the tax holiday begin to reverse. There is still a lot of uncertainty surrounding inflation, which complicates the job of policymakers. We will see what April 2 brings regarding additional tariffs.

If the economic outlook did not worsen, the Bank of Canada might consider pausing after cutting rates at seven consecutive meetings. However, the Canadian economy will likely slow significantly in the coming months.

Bank of Canada Governor Tiff Macklem said last week the bank would “”roceed carefully””amid the tariff war. Economists are still awaiting more clarity on tariffs before firming up their expectations for the next rate decision on April 16, when policymakers will also update their forecasts. Right now, traders are betting that the BoC will hold rates steady in April, but a lot can and will happen before then.

Today’s Labour Force Survey for January surprised on the high side as businesses expanded employment despite threats of a tariff war with the US.

According to Statistics Canada, employment increased by 76,000 last month, bringing the jobless rate down to 6.6%. Economists in a Bloomberg survey expected a smaller rise of 25,000 jobs, with the unemployment rate rising to 6.8%. This pattern of stronger-than-anticipated employment data has continued since November, with increases in both part-time and full-time work.

The employment rate—the proportion of the population aged 15 and older who are employed—increased 0.1 percentage points to 61.1% in January, marking the third consecutive monthly increase. These recent increases follow a period in which employment growth had been outpaced by population growth, resulting in the employment rate declining 1.7 percentage points from April 2023 to October 2024.

Manufacturing employment rose by 33,000 (+1.8%) in January, following an increase of 17,000 (+0.9%) in December. The increase in January was concentrated in Ontario (+11,000; +1.3%), Quebec (+9,700; +1.9%), and British Columbia (+8,700; +4.9%). Despite the gains in the past two months, overall employment in manufacturing changed little year over year in January.

Employment in professional, scientific, and technical services rose in January (+22,000; +1.1%), the second increase in the past three months. On a year-over-year basis, employment in the industry was up by 66,000 (+3.4%).

Employment gains led by manufacturing in January

Employment in construction increased by 19,000 (+1.2%) in January, building on a net increase of 47,000 (+2.9%) recorded from June to December 2024. On a year-over-year basis, employment in construction was up by 58,000 (+3.6%) in January.

Employment also increased in accommodation and food services (+15,000; +1.3%), transportation and warehousing (+13,000; +1.2%) and agriculture (+10,000; +4.4%) in January. At the same time, there were fewer people employed in “other services” (which includes personal and repair services) (-14,000; -1.8%).

The unemployment rate declined 0.1 percentage points to 6.6% in January, marking the second consecutive monthly decline from a peak of 6.9% in November 2024. The unemployment rate had previously increased 1.9 percentage points from March 2023 to November 2024, as labour market conditions cooled after a period of low unemployment rates and high job vacancies following the COVID-19 pandemic.

Many unemployed people are facing continued difficulties finding employment despite recent employment growth.

Wage inflation slowed markedly in the past three months, which is welcome news for the Bank of Canada. While the strength of this report has led some to speculate that the central bank will ease less aggressively, we agree that jumbo rate cuts are a thing of the past. However, monetary policy is still overly restrictive, especially if the Trump tariff threats come to fruition.

We expect the BoC to reduce the overnight rate from 3.00% today to 2.5% in quarter-point increments by the spring season. This should significantly boost Canadian housing market activity, particularly given the recent decline in mortgage rates.

Bottom Line

Employment in manufacturing may be particularly susceptible to changes in tariffs and foreign demand. The sector has the most jobs dependent on US demand for Canadian exports,

According to the Labour Force Survey, there were 1.9 million people employed in manufacturing in January, comprising 8.9% of total employment—the fourth largest sector in Canada. As a total share of jobs, manufacturing employment has decreased over the years, particularly in the 2000s, but has been more stable since 2010.

Automotive manufacturing industries are highly integrated with US supply chains; an estimated 68.3% of jobs in these industries depend on US demand for Canadian exports. People working in automotive manufacturing (which includes motor vehicle manufacturing, motor vehicle parts manufacturing and motor vehicle body and trailer manufacturing) were concentrated in Southern Ontario, particularly in the economic regions of Toronto (which accounted for 27.7% of all auto workers), Kitchener–Waterloo–Barrie (19.8%) and Windsor-Sarnia (14.8%) in January. In Windsor-Sarnia, automotive manufacturing industries accounted for 38.3% of manufacturing employment and 7.3% of total employment (three-month moving averages, not seasonally adjusted).

In January 2025, a collective bargaining agreement covered over one-quarter (26.5%) of automotive manufacturing employees. In comparison, the union coverage rate in the automotive industry was nearly twice as high in January 2002 (49.9%).

In January, food manufacturing was the most significant manufacturing subsector overall, accounting for 16.4% of all manufacturing employment. It was also the largest subsector across all provinces except Ontario. This subsector relies less on foreign demand, with 28.8% of jobs dependent on US demand for Canadian exports.

The recent acceleration in job growth may not prevent the Bank of Canada from cutting interest rates further this year. The recent wave of hiring likely won’t be enough to placate concerns that a potential Canada-US trade war could plunge the economy into a recession. Still, overnight swap traders eased expectations for a cut at the March 12 meeting to about 60% from close to 80% previously. We expect another 25 bp rate cut at the March and June BoC meetings.

The data were released simultaneously with US nonfarm payrolls, which increased by 143,000 in January as the unemployment rate was 4%. The loonie reversed the day’s loss against the US dollar, trading at C$1.4300 as of 8:34 a.m. in Ottawa. Canada’s two-year yield rose some seven basis points to the session’s high of 2.65%, with Canadian debt underperforming the US and developed markets.

Heightened trade uncertainty will continue to plague Canadian business hiring and spending decisions. Consumers, as well, will likely moderate spending in response to the uncertainty.

The Consumer Price Index (CPI) increased by 1.8% year-over-year in December, a slight decrease from the 1.9% rise in November. The main contributors to this slowdown were food purchased from restaurants and alcoholic beverages bought from stores. Excluding food, the CPI rose by 2.1% in December.

On December 14, 2024, a temporary GST/HST exemption on certain goods was introduced. The major categories affected by this tax break included food; alcoholic beverages, tobacco products, and recreational cannabis; recreation, education, and reading materials; as well as clothing and footwear.

On a monthly basis, the CPI dropped by 0.4% in December after remaining flat in November. However, on a seasonally adjusted basis, the CPI increased by 0.2%.

Prices decline for items impacted by the GST/HST break

Approximately 10% of the all-items Consumer Price Index (CPI) basket is affected by the tax exemption.

In December, Canadians paid less for food purchased from restaurants, experiencing a year-over-year decline of 1.6%. This marked the index’s first annual decrease and the largest monthly decline of 4.5%, attributed to the GST/HST break.

On a year-over-year basis, prices for alcoholic beverages purchased from stores fell by 1.3% in December, compared to a 1.9% increase in November. Monthly prices also dropped by 4.1%, nearly tripling the previous largest monthly decline for this series, which was recorded in December 2005 at 1.4%.

The prices for toys, games (excluding video games), and hobby supplies decreased by 7.2% year-over-year in December 2024, a significant drop from the 0.6% decline in November. Additionally, the index for children’s clothing fell by 10.6% in December compared with the same month in 2023.

The shelter component of the CPI grew at a slightly slower pace in December, rising by 4.5% year-over-year, following a 4.6% increase in November. Rent prices decelerated on a year-over-year basis in December, rising by 7.1% compared to a 7.7% increase in November. Since December 2021, rent prices have increased by 22.1%.

The mortgage interest cost index continued to slow for the 16th consecutive month, reaching an 11.7% increase year-over-year in December 2024, the smallest rise since October 2022, which was at 11.4%, as interest rates continued to climb. Additionally, gasoline prices rose due to base-year effects, and consumers paid more for travel services.

The central bank’s two preferred core inflation measures stabilized, averaging 2.65% year over year in October and November. Both core inflation measures rose a solid 0.3% m/m in seasonally adjusted terms and have been up at a 3+% pace over the past three months. Excluding food and energy, the ‘old’ core measure dipped to 1.9% year over year, its first move below 2% in more than three years.

The central bank’s two preferred core inflation measures declined, averaging 2.55% y/y in December. Both core inflation measures dipped m/m in seasonally adjusted terms and are up at a 3+% pace over the past three months.

Bottom Line

The inflation report for December 2024 showed a downward distortion due to the sales tax holiday, which will also affect the data for January. However, this effect will reverse in the following months. Core inflation measures are concerning, as the three-month moving average of trimmed-mean and median inflation has risen above 3.0%.

This inflation report is sufficient for the Bank of Canada to cut the overnight rate by 25 basis points to 3.0% on January 29, the date of its next decision.

A significant question remains regarding the potential Trump tariffs, which have been postponed to allow federal agencies time to analyze the trade, border, and currency policies of China, Canada, and Mexico. Trump mentioned yesterday that a 25% tariff would be implemented by February 1. However, government agencies typically do not move that quickly. Moreover, Trump aims to maintain pressure on these countries to ensure a robust response on border control and to reduce China’s influence on manufacturing in Mexico and Canada. The new administration also wishes to prevent Mexico and Canada from selling strategically important products to China.

I believe Trump wants to renegotiate the free trade deal between the US, Canada, and Mexico. Canada has already pledged to tighten its borders and has rejected Trump’s claim that it is exporting fentanyl to the US. I do not expect 25% tariffs on Canada; even if they are imposed, there would likely be Canadian retaliation, making the tariffs short-lived. This is a significant threat. Some have suggested that tariffs would compel the Bank of Canada to increase interest rates in order to combat inflation. While inflation might initially rise due to tariffs, the long-term effects would likely include layoffs and a marked slowdown in business and consumer spending, leading to increased unemployment. The Bank of Canada’s primary concern would be recession, not inflation.