The Domino Effect: Why Your Southern Ontario Real Estate Portfolio is More Tied to the U.S. Economy Than You Think

If you’re a real estate investor in Southern Ontario, you’ve probably developed a pretty sharp instinct for market shifts. You follow the local news, you keep an eye on vacancy rates, and you definitely notice when the Bank of Canada makes an announcement. So, when Statistics Canada recently released its latest inflation report showing the headline number had cooled to 1.7%, you might have felt a sense of cautious optimism. On the surface, it looks like the kind of news that signals stability, predictability, and perhaps even lower borrowing costs on the horizon.

But in the world of real estate and finance, the headline number is rarely the whole story. It’s more like the cover of a thick, complex novel – it gives you a hint, but it doesn’t tell you about the plot twists waiting inside.

I’ve been in this business long enough to know that the most significant risks—and opportunities—are often the ones hiding in plain sight, just beyond our immediate focus. Right now, while our own economic backyard seems relatively tidy, there are some storm clouds gathering south of the border. The economic pressures building in the United States have the potential to reach across the border and have a much bigger impact on your next mortgage rate than our own domestic inflation report. To truly understand where our market is headed, we need to look past the headline and unpack the powerful domino effect that starts in Washington and ends right here in our own backyard.

Reading Between the Lines of Our Own Inflation Report

Let’s start at home. That 1.7% inflation figure is, admittedly, a nice number to see. It’s below the Bank of Canada’s 2% target, which in a vacuum, would suggest that interest rate cuts are a real possibility. But we don't live in a vacuum. The first thing to understand is why that number is so low.

A huge chunk of that decrease came from a single, notoriously volatile source: gasoline prices. When you strip away the drop at the pumps, the underlying inflation rate was actually closer to 2.5%. That’s a significant difference. It’s like judging the health of an entire forest by looking at one type of tree.

This is why economists and central bankers are obsessed with something called "core inflation." Imagine you’re trying to get a clear, stable signal from a radio station, but there’s a lot of static. Core inflation is the act of filtering out that static—the wild swings in things like energy and food prices—to hear the clearer, underlying music of the economy.

In Canada, those core measures are currently sitting around 3%. They’ve been “sticky,” meaning they haven’t come down nearly as fast as the headline number. This tells the Bank of Canada that even without the noise from gas prices, fundamental price pressures are still stronger than they’d like. This stickiness puts our central bank in a tricky position. They’re in a "wait and see" mode, hesitant to make any bold moves until the picture becomes clearer. And a huge part of that picture is painted by what’s happening with our largest trading partner.

The Elephant in the Room: Stagflationary Winds from the South

If our own house is in reasonable, if not perfect, order, where is the uncertainty coming from? The answer, as it so often is, lies with our neighbours. The U.S. is currently wrestling with one of the most difficult economic scenarios imaginable: stagflation.

It’s an ugly word for an even uglier situation. You can break it down pretty easily:

• Stagnation: The economy is slowing down, growth is weak, and there's a risk of recession.

• Inflation: At the same time, prices for goods and services continue to rise, and in some cases, accelerate.

This is the ultimate nightmare for a central banker. The traditional tool for fighting inflation is to raise interest rates, making it more expensive to borrow and spend, thereby cooling the economy. But what do you do when the economy is already cool? Raising rates could easily tip a sluggish economy into a full-blown recession. On the other hand, the tool for fighting stagnation is to cut interest rates to encourage spending and investment. But doing that when inflation is already high is like throwing gasoline on a fire.

So, what’s causing this mess in the U.S.? A major factor discussed in the analysis is tariffs. Regardless of the political intent, from an economic standpoint, a tariff is simply a tax on imported goods. This tax does two things simultaneously, neither of them good. First, it makes those goods more expensive for businesses and consumers, which directly fuels inflation. Second, by raising the cost of doing business, it can cause companies to pull back on investment and hiring, which contributes to economic stagnation. It’s a classic case of being caught between a rock and a hard place.

We're seeing evidence of this in the U.S. Producer Price Index (PPI), which measures the costs for the companies that actually make the products. When the PPI comes in hot, it’s a strong warning sign that those higher costs will soon be passed on to consumers, pushing the consumer inflation rate higher.

The Cross-Border Ripple Effect: How the Fed's Problem Becomes Ours

This is where the story pivots and comes directly to our doorstep. You might be wondering, "Okay, that sounds tough for them, but why is it my problem when I’m trying to refinance a multi-family property in Southern Ontario?"

The connection is the deeply integrated financial system we share, specifically the bond market. Think of government bond yields as the wholesale price of money. When a government issues bonds, the yield is the return an investor gets. This yield is the benchmark that sets the foundation for almost every other lending rate in the economy.

Canadian and U.S. bond markets move in lockstep. They are not identical, but they are tightly correlated. When inflation fears in the U.S. push American bond yields higher, global investors who buy our bonds demand a similar rate of return. If they can get a higher, safer return in the U.S., they’ll have little reason to invest here unless our yields rise to compete.

This brings us to the final, crucial domino. Fixed-rate mortgages in Canada are priced directly off of Government of Canada bond yields.

Let me draw that line for you again:

• Inflation fears and economic policy in the U.S. cause U.S. bond yields to rise.

• To stay competitive, Canadian bond yields are forced to follow suit and rise as well.

• Canadian banks and lenders base their pricing for 3, 5, and 10-year fixed mortgages on those Canadian bond yields.

• The result: The rate you are quoted for your next commercial or residential mortgage goes up, even if the Bank of Canada hasn't touched its overnight rate.

This means we could be in a situation where our own domestic economy warrants a rate cut, but the Bank of Canada is effectively handcuffed by the financial pressures flowing north from the U.S. If they cut their key rate while bond yields are soaring, it can create instability and have little to no effect on the fixed mortgage rates that most people and businesses use.

For you, the investor in Southern Ontario, this creates a layer of complexity. It means that simply watching the Bank of Canada's announcements is no longer enough. The decisions made by the U.S. Federal Reserve in Washington D.C. could have a more direct and immediate impact on your borrowing costs for fixed-rate products over the next 12 to 24 months. It underscores the need to have a financing strategy that is both flexible and forward-looking, accounting for global as well as local economic trends.

At Red Maple Property Management, we believe that the best decisions are informed ones. Navigating this complex environment is what we do every day. By keeping our finger on the pulse of these critical, interconnected trends, we can help our clients not only protect their portfolios but also position themselves to capitalize on opportunities that others might miss. In a market this complex, being prepared isn't just an advantage—it's essential.