Housing Revival Derailed as Escalating Borrowing Costs Impact Real Estate Outlook
There were hopes that Canada’s beleaguered housing market would see modest increases in activity in 2026, but the trade war and surging oil prices dampened those expectations. Now, rising mortgage rates have quashed any hopes of a comeback.
Bond yields have spiked in recent weeks, with the Canada five-year bond yield reaching a new two-year high of 3.72 on Thursday. Lenders base their long-term fixed mortgage rates on the performance of that bond, and their rates have jumped by more than 0.25 per cent in the past month, approaching the mid-4-per-cent mark.
David Larock, owner of Toronto-based Integrated Mortgage Planners, said that current mortgage rates are still unusually low despite the high level of bond yields, because lenders are competing for a wave of pandemic-era mortgages that are renewing from their five-year terms. That means there is risk of more mortgage-rate hikes toward the end of the year, as the renewal wave eases and some lenders stop competing intensely.
He said fixed rates tend to be roughly 125 or even 150 basis points higher than the Canada five-year bond yield. Many five-year fixed rates are currently priced less than 100 basis points higher.
“If the spreads were to normalize, that would definitely require another quarter-point increase in rates, and that could happen anytime,” Mr. Larock said.
“Over the near-term, there’s a lot of upside risk in yields and in rates.”
The sentiment among most realtors is that lower immigration, weak consumer confidence and economic turbulence caused by the trade war are the foremost factors holding back the housing market.
John Pasalis, president of Move Smartly Realty in Toronto, said the last-minute breakdown of trade negotiations between Canada and the U.S. in August lessened homebuyers’ confidence in the Canadian economy and the housing market.
But economists say that rising fixed rates are going to worsen housing affordability, another major factor limiting the housing market and keeping buyers on the sidelines.
“The affordability calculus doesn’t make sense at these interest rates and house prices,” Robert Kavcic, senior economist with BMO Capital Markets, previously told The Globe and Mail.
“If we get sustained pressure in longer-term bond yields, that’ll keep a pretty hard lid on the market.”
Earlier this month, the Canadian Real Estate Association downgraded its forecast for 2026 and 2027, in part because the interest rate environment is looking bleak for buyers. CREA senior economist Shaun Cathcart wrote that markets have priced in the likelihood of higher variable rates, and borrowers are already feeling the impact of increased fixed yields.
CREA has reported sluggish sales and valuation numbers: National home transactions fell by 6.9 per cent in August compared with a year prior, and by 0.7 per cent on a seasonally adjusted month-by-month basis. The number of new homes listed climbed by 3.3 per cent from the previous month, and the national benchmark price of a home dropped by 3 per cent from a year ago.
“This fresh round of incoming headwinds is expected to dampen the prospects for further housing market momentum heading into 2027,” Mr. Cathcart said in a release.
The lack of growth is a change from early 2026, when CREA was forecasting that Canadian markets would see some modest increases throughout the year.
One notable reason for the increase in bond yields and mortgage rates has been the war in Iran and its inflationary impact on gas prices. However, Mr. Kavcic said he doesn’t believe that an end to the war would necessarily jump-start Canada’s housing market.
Bond yields are also climbing because of investor anxiety around the U.S. government’s fiscal policy. Canada’s bond yields are heavily tied to the performance of American bonds, and those concerns could dampen any sort of rebound.
“It would be a good thing, but it doesn’t necessarily cause the market to accelerate,” Mr. Kavcic said, adding that there are years of stagnation left in the market.
Andrew Lis, chief economist for Greater Vancouver Realtors, added that slow immigration and falling rents are contributing to an environment where investors are unwilling to enter the housing market. There have been short periods over the past couple of years, where the market improved for a month or two, but he said over all, the market is expected to continue lagging.
“You take all these factors together, and my opinion is this equates to a market that will probably move sideways for some time until these factors resolve. The major one I’d look for is a pickup in immigration,” Mr. Lis said.
This article was first reported by The Globe and Mail
