Canadian real estate is quickly changing as inflation drives bond yields much higher. First National, one of Canada’s largest non-bank mortgage lenders, warned rates are surging. Neil Silverberg, a senior analyst with the lender, wrote to clients explaining how fast yields have increased and how this will impact ownership. More Canadians are expected to stay put or consider renting in the near-term, as the market adjusts.
Mortgage Bond Yields Climbed Over 1 Basis Point Per Day In 2022
Canadian mortgage yields are rising very fast. To emphasize this point, First National explains only 139 days have passed this year. Yields for both the 5- and 10-year GoC and Canada Mortgage Bond (CMB) have increased over 1 basis point per day, on average. Silverberg doesn’t see yields continuing at this breakneck speed, but does see more room to grow.
Rising Bond Yields Are Driving Mortgage Rates A Lot Higher
Surging bond yields have driven residential mortgage lending much higher in 2022. According to the lender, a 5-year conventional mortgage went from 2.94% at the start of the year to the current 4.84%. “That is an increase of almost 200 basis points in less than 5 months,” explained Silverberg.
That adds up to a significant increase for borrowers that might be stretched. “If you had a mortgage totaling $1million with a regular amortization period of 25 years, monthly payments would have gone from $4,702 to $5,726 in a matter of months,” he said.
Higher Mortgage Payments Will Make More Consider Renting
Higher mortgage payments will push more to consider renting a property. As rates rise to non-stimulus levels, borrowers will pay more interest. This reduces the amount towards loan principal and allocates more to interest costs. Both rising payment size and interest costs will create more incentive to rent.
Higher lending rates tend to reduce home prices, but that takes an adjustment period. In the meantime, if home prices fall more people will be deterred from buying.
“Does a payment change of over $1,000 a month on a $1mm mortgage or $500 a month on a $500k mortgage get people thinking about renting instead? The answer is yes. This is especially true when mortgage rates move up faster than housing prices move down,” said Silverberg.
Rising rates won’t just encourage those with more modest incomes to consider renting. A few weeks ago, PIMCO exec and bond expert Mark Kiesel said he may considering selling his home to rent. He previously sold his home at the top of the US housing bubble and bought at the bottom, nearly timing the trade perfectly based largely on the bond market. While he’s in the US, similar monetary and valuation conditions exist in both regions.
Granted, US real estate isn’t at the extreme seen in Canada.