Canada: Housing market to lose momentum as bond yields rise – CE

Record low inventory should continue to drive strong house price gains in the first half of the year, but economists at Capital Economics expect house price inflation to slow beyond then as bond yields and mortgage rates start to rise.

Key quotes

“While prices should rise strongly in the first half of 2021, the market will soon have to contend with higher interest rates. We still think the Bank of Canada will keep its policy rate at 0.25% until 2023, but we have changed our assessment of inflation breakevens now the global vaccination process is underway and governments, at least those in North America, are still eyeing further stimulus. We now expect Canada’s 10-year bond yield to rise to 1.5% this year and 1.75% in 2022, from the current 1.1%.”

“Our yield forecasts imply the five-year fixed mortgage rate will rise from 1.8% to 2.3% if the spread were unchanged, or to 2.8% if the spread returned to the pre-pandemic norm.”

“We expect house price inflation to slow from an average of 10% in the first quarter to 5% by the end of the year, and to little more than 2% by the end of 2022.”