Intelligent Investment

Cost of Real Estate Debt Rises Further as Bond Yields Reach Nearly 16-Year Highs

Canada Monthly Mortgage Commentary

September 29, 2023 2 Minute Read

While the impact of higher interest rates continues to make its way through the Canadian economy, fluctuations in the inflation indicator have muddied the short term outlook for interest rates. After the Bank of Canada held the policy interest rate flat at 5.00% this month, headline as well as the average of the central bank’s two preferred core inflation metrics both accelerated to 4.0% in August 2023. Despite the Bank of Canada saying their inflation target is “now in sight” and have characterized the latest data as just ordinary volatility, inflation is trending in the wrong direction and strengthens the case for another potential interest rate hike. Meanwhile, GDP growth surprisingly turned negative in Q2 2023 which would suggest an economy that is slowing down more than expected. These conflicting indicators combined with hawkish sentiment from the Federal Reserve factored into a financial markets selloff as investors coped with the uncertain path forward for interest rates and awaited further signals from the central banks.

Bond yields have risen to nearly 16-year highs, propelled by the speculation that interest rates may have to stay higher for longer and thereby delaying the rate cuts expected next year. The Canada 10-year bond currently trades at over 4.0% which is a level not seen since late 2007. This further pushes up the cost of real estate debt and continues to be a challenging financing environment in Canada. While interest rates are still largely expected to drop in 2024, albeit to slightly lesser degrees than perhaps originally expected, yields on the long end of the curve are anticipated to remain stickier as the cost of debt normalizes to its long term average.

For the multifamily sector, developers have received a slight reprieve from higher costs in the form of a 100% rebate on the federal portion of the sales tax for new rental construction. As a result, some projects that had been previously shelved or deferred may now be more economically viable and could stand to unlock thousands of additional units of rental housing across Canada over the coming years. With some provinces also intending to follow suit and eliminate the remaining provincial portion of the sales tax, this would further incentivize much needed additional multifamily development in Canada.

Economic Highlights:

  • Q2 2023 GDP growth contracted 0.2% led by lower housing construction, international trade and consumer spending.
  • Headline inflation rose to 4.0% in August 2023 while CPI-Median and CPI-Trim increased to 4.1% and 3.9%, respectively.
  • Employment rose by 39,900 jobs in August 2023 and the unemployment rate held flat at 5.5%.



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