Surge in 5-Year Bond Yields to Drive Mortgage Rates Higher

Published February 27, 2023 by Real Estate Leads

Canadian concerned about the affordability of the home they need for themselves number in the thousands, and that may well be the hundreds of thousands. Housing affordability and the scarcity of affordable housing is something being seen in nearly all 1st-World countries around the globe though, so it is certainly not unique to Canada. The scarcity of affordable housing has so many different factors contributing to it, but none if more relevant than the fact that there are more young people than ever coming into the stage of their lives where they’re ready to buy a home.

The problem is now that – for a whole set of other reasons – they’re not able to afford that home the same way previous generations could when they were the same age. Despite having the same education and earning potential levels. It’s not a good situation any way you slice it, but there’s also no immediate fix available for it. Housing demand WAY outstrips supply, and especially in major metro areas of the country where most the people see the jobs that fit their lives and a future for themselves.

Interest rate rises paired with more daunting mortgage rates mean that fewer people see themselves as potential homebuyers. That is not something they will want for themselves, and realtors who are looking for new homebuyer clientele or who have a client with a home that’s not selling won’t be pleased to hear that either. A cooling real estate market has it pluses, but for realtors it’s not ideal. However, our online real estate lead generation system here at Real Estate Leads can certainly help realtors who don’t have clientele to the extent they’d like.

Course Reversal

All of this may be becoming even more of an acute issue with news that the Government of Canada (GoC) 5-year bond yield hit a new multi-month high last week. What this means is that yields have reversed course now, and with economic data coming in much hotter than expected. This has the potential to drive home prices lower, but the competitive nature of credit markets means that Government bond yields influence interest on similar terms.

Before getting further into this, let’s preface a bit by looking at the 5-year GoC bond, one that directly influences the 5-year fixed rate mortgage and was the most popular mortgage product until recent record-low rates led to so many people opting to go with variable mortgages.

And so here we are now with Canadian bond yields having surged over the past few weeks, as inflation fails to cool as fast as economist hoped it would. The GoC 5-year bond closing at 3.54% on Feb 21, 2023 is a new high for this year and the highest since November of last year.

If this is indicative of a beginning trend then we may have a market shaping up with conditions seen around 2008, and if you’re reading this blog then you likely remember what happened then. The GoC 5-year bond rate may be going even higher too, as last week it moved up again

This is a big change from a few months ago, as up until 3 weeks ago, falling yields was all you would have heard of. The 5-year yield had fallen to just 2.8% in the middle of January ’23 but since then it has added 55 basis points and that is definitely a meteoric gain over such a short time.

Yields Higher & Home Prices Lower

As for what falling yields would mean with implications for the housing market, the rise in f5-year bond yields may have big implications for an already struggling housing market. We can see that even with the correction of the past year, home prices are still up 30% from pre -pandemic levels. While interest rates have been hiked again by the BoC recently, they did say they would put a pause on them.

But even if with a pause (and there’s not guarantee of it staying in place, with some economists saying that external price hiking may force their hand again) there are still relatively high rates making mortgages on still-overpriced homes that much more intimidating for would-be buyers. Higher mortgage rates will also mean fewer new build houses in the market, and with more potential buyers waiting for rates to cool down, house prices will very likely surge further with accumulated inflation on commodity prices and fewer new build houses available on the market.


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