There were hopes that Canada’s struggling housing market would see a modest pickup in 2026. But the trade war and higher oil prices put a damper on those expectations. Now, rising mortgage rates are creating another hurdle for a market that was hoping to gain some momentum.
Bond yields have jumped in recent weeks, with the Canada five-year bond yield reaching a new two-year high of 3.72. Since lenders use the five-year bond as a guide when setting longer-term fixed mortgage rates, those rates have also moved higher, rising more than 0.25 per cent over the past month and getting close to the mid-4-per-cent range.
David Larock, owner of Toronto-based Integrated Mortgage Planners, says mortgage rates are still relatively low compared with where bond yields would normally put them. One reason is that lenders are competing for the large number of pandemic-era mortgages that are now coming up for renewal after five years.
That competition may not last forever. As the wave of renewals starts to ease, some lenders could become less aggressive, which could put more upward pressure on mortgage rates later this year.
Larock says fixed mortgage rates would normally be about 125 or even 150 basis points above the Canada five-year bond yield. Right now, many five-year fixed rates are less than 100 basis points higher.
“If the spreads were to normalize, that would definitely require another quarter-point increase in rates, and that could happen anytime,” Mr. Larock said. “Over the near-term, there’s a lot of upside risk in yields and in rates.”
For realtors, there are already several factors weighing on the market. Lower immigration, weak consumer confidence and the economic uncertainty created by the trade war are all making buyers more cautious.
The breakdown of trade negotiations between Canada and the U.S. in August added to that uncertainty and further weakened confidence in both the Canadian economy and housing market.
Now, economists are warning that higher fixed mortgage rates could make affordability even more difficult, giving buyers another reason to stay on the sidelines.
Earlier this month, the Canadian Real Estate Association downgraded its forecast for 2026 and 2027, partly because the interest-rate outlook has become less favourable for buyers. CREA senior economist Shaun Cathcart said markets have already priced in the possibility of higher variable rates, while borrowers are also dealing with the impact of rising fixed mortgage rates.
The latest CREA numbers show the market is still struggling to build momentum. National home sales were down 6.9 per cent in August compared with a year earlier and fell 0.7 per cent on a seasonally adjusted month-by-month basis. New listings increased 3.3 per cent from the previous month, while the national benchmark home price was down 3 per cent from a year ago.
That is a very different outlook from the beginning of 2026, when CREA was expecting Canadian housing markets to see modest gains during the year.
The war in Iran and its impact on oil and gas prices has been one of the reasons bond yields and mortgage rates have moved higher. But even if the conflict comes to an end, it may not be enough on its own to get the housing market moving again.
Bond yields are also being pushed higher by concerns among investors about U.S. government fiscal policy. Since Canadian bond yields are closely tied to U.S. bond markets, those concerns could continue to put pressure on Canadian mortgage rates.
Andrew Lis, chief economist for Greater Vancouver Realtors, points to another issue: slower immigration and falling rents are making real estate less attractive to investors. While there have been short periods over the past couple of years when the market improved for a month or two, he expects the overall market to continue to lag.
“You take all these factors together, and my opinion is this equates to a market that will probably move sideways for some time until these factors resolve. The major one I’d look for is a pickup in immigration,” Mr. Lis said.