War In the Middle East Could Hurt Property Values
Global financial markets shifted overnight as a joint U.S. and Israeli military operation targeted Iran. Tehran confirmed the death of Supreme Leader Khamenei after missiles struck Dubai. Iran responded by blockading the Strait of Hormuz. This narrow waterway carries 20% of the world's daily oil supply. It also serves as the primary export route for global liquefied natural gas.
This article explains the potential knock-on effects, connecting the dots from a war in the Middle East to a drop in home value.
Energy Prices Spike and Fuel Inflation
Energy supplies tighten instantly when tankers cannot pass through the Strait. Oil prices moved higher within minutes of the blockade. Natural gas prices will follow this trend within days. These costs filter through every part of the modern economy. Logistics firms pay more for fuel. Manufacturers spend more on power. Grocery stores raise prices as transport costs climb.
Inflation gains a powerful new tailwind from this energy shock. Central banks spent three years fighting to control rising prices. This conflict erases that progress. Energy economists previously modelled a Hormuz closure. They predicted a fast and severe impact on global markets.
Central Banks Hike Rates to Curb Prices
The Bank of Canada faces immediate pressure to raise interest rates. Governor Tiff Macklem must protect the dollar and cool domestic prices. The central bank will be keen to avoid the disruptively high inflation levels seen at the end of the pandemic. Higher rates make borrowing more expensive for everyone.
Mortgage payments will climb for millions of Canadian homeowners. Owners on variable rates feel this hit immediately. Those renewing fixed-rate contracts in the next year will pay much more. Monthly outgoings will rise by hundreds of dollars. This squeeze hits households that already struggle with high living costs.
THE DOMINO EFFECT |
|---|
| 1. War closes oil shipping routes. |
| 2. Energy costs drive inflation higher. |
| 3. Central banks raise interest rates. |
| 4. Mortgage and government debt costs climb. |
Public Debt Servicing Drains Tax Revenue
Interest payments on government debt rise alongside central bank rates. Federal and Provincial borrowing in Canada sits at record levels. A larger share of income tax revenue now pays for interest. Rising deficits and debt levels, combined with increases in interest rates, leave less money for public services and defence spending.
Municipalities may raise property taxes to fill budget gaps. The federal government reduces payments to provinces when debt costs rise. As a result, provinces send less funding to cities and towns. Municipal leaders must still balance their budgets.
To add to municipal financial woes, in some cases, revenue from property development fees has sharply declined. Lower development fees are due to a significant drop in condo pre-sales, which has led to fewer developers initiating new projects.
Consequently, city governments with less revenue assistance from the province and lower development revenue are increasingly reliant on increases in other revenue sources, such as permits, parking fees, and property taxes. While people can often avoid many fees because they are for optional services, property owners cannot escape or relocate their real estate. Voters also frequently support taxes on property "wealth" even if the owners do not have cash readily available.
Home Prices Fall as Carrying Costs Rise
Total homebuyingbudgets drop when rates and taxes rise. Buyers qualify for smaller mortgages because debt costs consume their income. Higher rates and their resulting lower homebuying budgets reduce total demand for housing. High income taxes also prevent buyers from saving larger down payments.
Property values must fall if demand drops while supply remains steady. The laws of supply and demand dictate this outcome. Real estate becomes a less attractive investment as carrying costs erode potential returns. This combination of factors creates a significant risk for the Canadian housing market.
Market Risks Are A Possibility, Not A Guarantee
Markets remain volatile, and the outcomes are uncertain during geopolitical upheavals. The above scenario represents a real risk rather than a certainty.
However, some building blocks for this scenario are certain.
Government deficits contribute to the accumulated federal and provincial piles of debt.
Banks already predicted mortgage rates and government borrowing costs to rise by late 2026 or mid-2027.
Toronto and Vancouver collect significantly less revenue as developers pause new projects amid a weak pre-sale market. City halls must hike property taxes to fund their operations.
The risk highlighted in this article is that the Middle East conflict and its impact on oil prices and inflation exacerbate and accelerate existing financial pressures. Property values are more likely fall if these trends continue.
