Canadian Real Estate Is About To See Rate Pressure Not Seen Since The 90s Crash: BMO

Canadian real estate prices are about to get downward pressure not seen in decades. Government of Canada (GoC) 5-year bond yields are soaring and it’ll have a big impact on housing, says BMO. In a research note to investors, they warn mortgage costs are rising towards a decade high. However, the level of mortgage rates are less of a concern compared to how fast they got there. Canadians have only seen a climb this fast at one other point in history — during the 90s real estate crash.

Bank of Canada and US Fed Are Pressuring Rates Higher 

The BoC and US Federal Reserve are sending a message to markets — higher interest rates are coming. Both central banks have reiterated their commitment to control inflation. Elevated inflation will require the curbing of excess demand. To slow demand, they may need to raise rates to levels not seen since the Global Financial Crisis.

“The aggressive Bank of Canada rhetoric and a further back-up in U.S. yields put pressure on the entire GoC curve. Focusing on arguably the most important term for the domestic housing market, five-year yields probed the 2.9% threshold. These yields have not been above that mark since early 2010,” wrote Douglas Porter, BMO’s chief economist. 

As Porter noted, the GoC 5-year bond yield is one of the most important influences for housing. It directly influences the cost of the 5-year fixed rate mortgage. Until recently, most mortgage debt issued was to borrowers opting for this product.

It wasn’t until central banks ignored the bond market’s inflation warnings that variable rate became the majority. Buyers were watching all other debt products rise, except for this one. It’s understandable if they saw it and felt like they were borrowing debt on cheat mode.

Still, a 5-year fixed is the second most popular term and is likely to claim the top spot in the future. If variables prove to be a passing phase due to market inefficiencies, they might even take the top spot back.

Soaring GoC 5-year bond yields are climbing at one of the fastest rates in history, and likely to raise expectations. The BMO analysis shows the GoC 5-year bond yield jumped almost 2 points in less than a year. It might not sound like a lot, but consider the target rate of inflation is only two points. Bond yields, and 5-year mortgages, increased by that amount in less than a year.

This level of breakneck growth has only been seen once before, warns BMO. “There was only one other episode in the past 30 years when 5-years moved so quickly, in 1994- 95. Suffice it to say that this rapid climb in rates bodes ill for housing,” wrote Porter.  

Falling demand for resales will also trickle into new homes. “Note that the weakest year for housing starts in the past 60 years just happens to have been in 1995. True, that was at the tail end of a deep slide in home prices, with the 1994/95 tightening the final slap for the sector,” he explained. 

TL;DR Canada’s potential real estate correction is seeing the cost of credit rise at a rate not seen since the end of the last major correction.



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  • Mr.G 2 years ago

    Prices are slowly retreating back to pre-pandemic prices. The real crash comes when the unemployment rate spikes. For now the only thing crashing are realtor and mortgage broker commissions. Lenders are good for now so long as borrowers are employed and continue to pay their mortgages.

    • Yourwrongagain 2 years ago

      For prices to hit pre pandemic prices would be a miracle. Very unlikely..

  • Ahmed 2 years ago

    I’ll concur. When us old timers were watching the BOC and Fed ignore inflation back in May 2021 it was clear they were going to gamble a crisis and assume the next recession will also be a great time to be Canadian. The problem is they don’t think at all.

  • Mark Bayly 2 years ago

    1.5 per cent interest rates is not aggressive It’s putting out a fire with a squirt gun Interest rates have to go to 7 per cent to have any affect in the artificial Inflation numbers coming from the feds Real inflation is far higher

  • Chris 2 years ago

    We won’t see the bigger drop until these ultra cheap mortgages start coming up for renewal in 2024-2026. Lots of families stretched their budgets and that’s when they’re going to get whacked by rate increases.

  • Tim Toon 2 years ago

    This is where that lovely bail in program works beautifully, when the renewers start crashing guess who gets to bail out the banks.

    Looks like the 2008 US all over again except here.

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