Canada's housing market appears to have moved past its weakest point, but rising five-year bond yields are driving mortgage rates higher and could temper the pace of the recovery, according to Capital Economics in a note Tuesday.
The average five-year fixed mortgage rate has climbed 30 basis points to 4.13% since the US-Iran war began, while recent gains in bond yields suggest further upward pressure could be ahead, wrote Capital Economics Chief North America Economists Stephen Brown and Ariane Curtis in the note.
Still, expectations for the Bank of Canada to raise its policy rate by only 50 basis points next year, compared with roughly 85bps currently priced into markets, suggest bond yields and mortgage rates could ease somewhat in 2027, the two economists added.
As a result, home prices are expected to remain broadly flat for the rest of 2026 before rising 2.5% next year and a further 3% in 2028, according to Capital Economics.
The latest data offers further reassurance that Canada's housing market has moved past its worst, with seasonally adjusted home sales rising 0.5% month over month in July, marking a fourth consecutive monthly gain. The recent increase in building permits also suggests that July's decline in housing starts may be temporary, said Capital Economics.