Canada

Canadian Mortgage Costs To Hit “Inconceivable” Levels After Bond Yields Surge: BMO

Canadians should say good-bye to the 15-or-so year experiment with cheap debt, because it’s over. Government of Canada (GoC) 5-year bond yields continued to boom, accelerating this week. The yield now sits at the highest level since before the Great Recession and isn’t expected to slow down. Mortgage rates will see a big impact from this, and are heading to levels thought were no longer possible to hit. That is, until inflation also hit levels no longer thought possible, requiring higher rates to stabilize the economy.

Canadian Bond Yields Are Climbing Even Faster Than Expected 

The GoC 5-year bond yield is soaring at one of the fastest rates ever. It reached 3.185% on Wednesday morning, climbing 30.96 basis points (bps) over the past 5 trading days. For context, over the past 30 days it climbed 34.63 bps, so about 90% of the increase was just this past week.

Over the past 30 years, this yield has only increased this fast one other time — during the 90s bubble. Needless to say, this isn’t a great sign for real estate prices.

The Era of Low Rates Is Gone, The New Normal Is Healthier Finance

Canada hasn’t seen yields at these levels since the Global Financial Crisis (GFC). “Canadian 5-year government bond yields are now trading above 3% for the first time in over a decade,” explains Robert Kavcic, a senior economist at BMO

“This is a massive reversal from the 0.3% pandemic low set around mid-2020. Those who were lulled into thinking that pandemic-era interest rates were the new normal are getting a bit of a rude awakening with respect to financing costs.” 

Higher Yields Means Much Higher Mortgage Rates

The 5-year GoC bond yield has a direct impact on a key mortgage interest rate — the 5-year fixed rate mortgage. Since capital competes for similar terms, rising yields directly influence mortgage costs. This means expect much higher mortgage rates in the not-so-distant future.

“… the last time the 5-year sat around this level in 2007-08, 5-year fixed mortgage rates were typically north of 5%,” says Kavcic.  

A whole generation of people are under the impression that cheap money was the new normal. In reality, it was more like a 15-year experiment due to the GFC. “We seem headed in that direction, which would have been inconceivable for many in recent years. Meantime, surging 5-year yields reflect the market view that short-term rates will be close behind, so there won’t be any hiding in variable rates,” he explains.

Traditionally, the 5-year fixed rate mortgage is the most popular type of mortgage, as home buyers locked-in costs. Normally bond yields rise to cool excessively easy credit, sending a signal to short-term rates. As the Bank of Canada (BoC) ignored the bond market and soaring inflation, home buyers sought variables instead of throttling. It was a highly unusual situation caused by a miscalculation from the BoC that isn’t expected to persist in the future. That’s a good thing.

Last week the head of BMO Capital Markets also stated he expects a reset towards more historic rates. He also stated he would be “shocked” if Canadian real estate prices don’t drop double-digits. All assets are expected to normalize with capital costs, helping to cool destabilizing inflation.

29 Comments

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  • Trader Jim 1 week ago

    I think the worst part is we were all convinced the country would be able to pump monetary stimulus into the economy forever. I’d wager half the country doesn’t even know what a neutral policy rate is.

    • Jon 6 days ago

      Maybe you were convinced. Smart people knew better.

    • Robert in Vancouver 6 days ago

      Most of the country doesn’t know what monetary policy is or care to know, including our prime minister.

    • JEFF13 6 days ago

      Give it until September and they will back track and lower rates. The debt-ridden global economy cannot just support those rates without imploding.

      • george 6 days ago

        Hahaha, you are right. Politicians and FIRE don’t want to stop this madness 🙂

  • Ethan Wu 1 week ago

    Above 5 points is still way too cheap. Maybe if inflation was 2 points it would make sense but at 8% let it rip. Things are broken if inflation is rising at a 30-year high, inflation is at an all-time low, but interest rates still haven’t climbed to 2020 levels.

  • Sam 1 week ago

    While this publication reports facts and tends to cite credible sources and data, I am finding that the dramatization of the news and the headlines is extreme and skews what otherwise maybe considered just simply news, forecasts and opinion.
    This takes away from the value you offer.
    I don’t mind reading opinions and its up to me to judge the credibility for myself. But please spare us the drama and fantastical headlines. I cannot reconcile what is it you are trying to achieve.
    5%/5 year mortgage rate is NOT “inconceivable” .

    • Credit Guy 4 days ago

      Personal bias has you missing the point of the article. The reason you’re seeing facts is they’re very responsible with their sourcing.

      The reason you think it’s overly dramatic is you think the subject is the numbers, but a forecast isn’t a fact. The subject of the article is BMO calling the rate “inconceivable,” they aren’t. The story is a bank would refer to mortgage levels at this level providing insight into the financial system not having thought rates at this level were impossible.

  • AJ 1 week ago

    Crash in housing prices isnt a good sign for the economy

    • David Zunker 5 days ago

      Are you aware that mortgage rates were 14% to 17% in the 1970s and early 80s?
      If they had remained high homes would not have become a commodity for speculative investors and housing might not have gone up 300% in the last 25 years.

      • Jerry 5 days ago

        It’s cute how you try to compare things from the 1980s to now. Our standard of living has consistently gone down since the fifties. Every decade we go down a notch. So what are you trying to talk about? This isn’t the 1980s.

      • Bryan Creagan 4 days ago

        Minor correction. High was 22%, I had one

  • Hans Gutfreund 1 week ago

    New plan. Triple the amount of new immigrants and voila the demand will be stronger than ever.

  • Brett Gibson 1 week ago

    1981-like inflation. 1981-like rates. Simple.

  • J 1 week ago

    30% drop for the COVID frenzy to 2019 which was already in a bubble (1.75% BoC Rate). Throw in all the house hoarders in the mix, we’ll have a supply glut everyone including end-user’s holding out for top dollar all listing at once. It’ll be a falling slope feedback loop as crazy as the rise was. What goes up must come down. I just hope people knew what they were signing for and is happy with their home. Best of luck, I’ll be moving out of this country within two years.

    • Doomcouver 1 week ago

      New homebuyers deserve all the financial pain they have coming. Canadians got a front-row seat on what a housing bubble looks like during the GFC. Assuming Canada was somehow exceptional, and immune from housing collapse was delusional.

      Canada’s housing market isn’t any safer price-wise than the USA’s. All of Canada’s mortgages that have terms shorter than the amortization period are what I call “potentially” sub-prime. In a sense Canada’s mortgages have always been riskier than the USA’s even back in 2008.

    • brian lee 7 days ago

      Good decision as Canada is turning into a banana republic really fast. Lawlessness at it’s peak and we’ll be in line with 3rd world pretty fast.

  • Buythecrash 1 week ago

    Interest is the cost of money and should roughly equate to inflation. Too much money printing – hard to get that genie back in the bottle. BoC has been asleep at the wheel or maybe it was they didn’t know there was a wheel. Tough news for those who bought into this hype. 50% of res mortgages just renewed this last 2 years. Those guys are in for a major shock.

  • Lou 7 days ago

    When does country oversees the gauging of internal price. Control inflation by securing measures policies some of them at least, the groceries chain are making a fortune how come this is not regulated. Interest rates is only one part of the equation at the end of the chain. Those like I can’t encourage the linear thinking and resort in directly addressing to reverse their impact on CPI.

    • Scott 6 days ago

      Grocery stores are heavily regulated: Market competition. The most effective, efficient regulation ever invented…

  • Atief 7 days ago

    🌹

  • William Kwan 7 days ago

    Great article and insight into the Canadian housing market. The Canadian housing market is resilient and will be able to get through these headwinds. Remember inflation is a global phenomenon and is a necessary side effect of getting the world and its work force back and employed. Working at one of the large big 5 banks I saw how the low interest rates and government programs helped individual households while others further thrived with all this cheap money in hand. If you’re part of this middle class like me remember inflation only hits you when you spend your money so save where you can and we will get through this together. Spend less and inflation will go away!

    • Shoena 6 days ago

      Inflation is a global phenomenon if you exclude half the world’s population and just include the countries you know about off the top of your head. Otherwise most countries are experiencing inflation similar to highs in the 2010s.

  • John Edmond 6 days ago

    Devalue the dollar. Average wage $1.25 per hour. Loaf of bread, .5 cents.
    Go back on the gold standard. Bring the penny back. Solver coins. Good idea.

  • Shaquille O'neal 6 days ago

    I don’t disagree that central banks around the world deserve some blame for higher inflation, as their mandate is primarily price stabilization.

    But, COVID led to large scale disruption of goods and services. It meant more people chasing after fewer goods (hence price increases). And governments around the world provided a large amount of support, in light of immense uncertainty during some of the more acute phases of the pandemic.

    And to some degree, the Ukraine/Russia conflict is adding to disruptions – especially of food inflation, gas and other energy prices, etc.

    It’s hard for monetary policy to fully compensate and so quickly. But I generally agree that they were late in adjusting, which could have meant having lower (but perhaps still above average (inflation).

    Canadian households are especially vulnerable given the higher level of household debt.

    • Vishal 6 days ago

      Inflation was above target in April 2021 when the banks started to say what the heck are you doing? The Bank of Canada pretended inflation didn’t exist and it would be transitory.

      They were using QE to create even more inflation until November. You should check out Stephen’s Parliament testimony on inflation. Even the Bank of Canada stopped lying the day after.

  • Joe 6 days ago

    Interest rates were brought down to inconceivable levels for 13 years and stimulus handed to banks which helped rig stocks, housing and commodities. Savers were destroyed and reckless borrowing and spending encouraged.

    • Whiskey Foxtrot 6 days ago

      Always a good point. Pensions were crushed and now became real estate firms and mortgage lenders, which should tell you a lot. They dropped bonds and the replacement was perpetual payments to use their property.

  • Elaine 3 days ago

    My Seattle son-in-law recently bought US 5 year Treasuries yielding 9% – a far cry from Cdn Govt bonds at 3%+.

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