Fixed rates are soaring, with new doubts about the Bank of Canada’s next steps. What’s in store for the mortgage market?
Global bond market jitters are sending yields higher, with the US 10-year Treasury yield climbing on Monday to a level not seen since 2007. In Canada, the five-year yield is also surging – putting upward pressure on fixed mortgage rates and potentially casting doubt on the housing market outlook for the rest of the year.
Lenders have scrambled to adjust fixed rates amid that rise, which has seen the five-year yield spike by about 90 basis points from where it lay at the same time last year.
The reasons for the bond market unease range from geopolitical chaos to soaring oil prices as the US-Iran war continues, fuelling fears that higher costs will spill into inflation and potentially push central banks into raising interest rates.
The worsening rate outlook is looming large for homebuyers and owners as the fall market comes into view, according to Toronto-based Tango Financial mortgage agent and realtor Victor Tran (pictured top).
“Fixed mortgage rates have been climbing and now the forecasts for the prime rate will probably [rise] – because it’s not looking too good,” Tran told Canadian Mortgage Professional. “It’s likely going to be increasing sooner than we expected.
“It’s all tied to the ongoing tension and trade war with the US. So that’s certainly starting off the fall slower than expected. Typically, the spring market is the best time to sell and then the fall market is the second best, but it’s definitely starting from a slower pace.”
Canada’s housing market faces yet another challenge
That oil price volatility has clouded the Canadian housing outlook since the end of February, while the beginning of a potentially punishing US-Canada trade war in August may also have given some prospective homebuyers pause as they weigh a move.
The recent rise in bond yields and borrowing costs marks just the latest twist for buyers and could move a hoped-for housing recovery even further back.
“Just in the past less than two weeks, the five-year government bond yield increased by 40 basis points. That’s a huge increase in a short amount of time,” Tran said. “The buyers that had rates locked in before the rate hike might feel some pressure into finding something just so they can secure the rate.
“But it’s tough in certain markets where there’s bidding wars in a lot of desirable areas. The buyers that are looking for condos – they have a little bit more breathing room. There’s not as much pressure, there’s still some supply out there. But the rising bond yields and rising fixed mortgage rates definitely kind of throws a wrench in things.”
Could central bank rate hikes be ahead?
In the US, soaring Treasury yields and inflation concerns have seen traders rapidly up their expectations of a rate hike in tomorrow’s announcement by the Federal Reserve.
The Bank of Canada has stayed on hold this year and is still expected to keep rate hikes on ice in its next decision, scheduled for October 28. Still, economists see a growing chance of an increase in December if oil prices continue to rise – possibly spelling bad news for variable-rate mortgage holders and shoppers who could see their rates jump.
“The variable-rate forecast isn’t looking too good either,” Tran said. “So we have people sitting in variable rates considering locking into fixed rates, for example.”
That’s not to say a deep freeze is necessarily ahead. Potential homebuyers have been dealing with dramatic headlines for years, and Tran said many will decide to push ahead with their move despite the wider turbulence.
“It’s really hard to plan for these things. I think a lot of buyers are kind of just tired, especially buyers that have been waiting to purchase a home and that have been in the market for a little while,” he said.
“I think regardless of what happens in the market, they will still move forward with the purchase. Because time goes on. Life moves on. You can only wait for so long for certain opportunities.”
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