Canadian Real Estate Prices May Hit A Roadblock As Bonds Surge

Canadian Real Estate Prices May Hit A Roadblock As Bonds Surge

Canada’s falling bond yields provided cheap mortgage credit, helping to boost home prices. Now it’s reversing course, with Government of Canada (GoC) 5 year bond yields rising sharply. The yields directly influence fixed mortgage rates, and over just a few days they’ve nearly reversed the discount given after the US banking crisis. Higher rates will reduce leverage, and provide a drag on home price growth. 

Canadian 5 Year Government Bond Yields Are Surging Higher  

Canadian government bond yields bounced back rapidly. The GoC 5 year bond yield closed at 3.579% last week, rising 27.13 basis points over 5 trading days, which is an unbelievably rapid climb higher. The yield is now 48.38 bps higher than a month before, meaning more than half the increase was just last week. Trading is closed today for the US holiday. 

Falling Bond Yields Helped To Boost Home Prices Recently

The yield previously peaked at 3.651% in early March, before plummeting to a low of 2.766% after the U.S. banking crisis. A combination of global liquidity injections and storm clouds gathering brought down yields, which in turn made fixed rate mortgages of a similar term, cheaper. 

Canadian home prices have also reversed course during this period. It’s probably not a coincidence that a typical home increased about the same amount as the added leverage from lower rates. Even the BoC has acknowledged that cheaper mortgages fuel higher home prices

Canadian Real Estate May See Yields Knock The Wind Out of Its Sail

That’s why the recent reversal of bond yields is worth paying attention to. It’s just 7 bps, less than a quarter of last week’s increase, away from retaking the high.

Rising yields almost certainly mean rising mortgage rates, making it more difficult for home prices to grow. Whether that drag is enough to lead to falling home prices remains to be seen.