Will rising rates throw cold water on Canada’s overheated housing market?

As Canadians digest Donald Trump’s surprising election victory on Nov. 8, few have contemplated the effect of that victory on the Canadian housing market.

“Since the election, bond markets have been swept up in one of the biggest selloffs in history,” says Aubrey Basdeo, managing director and head of fixed income, BlackRock Canada. “Expectations of a rebalancing from monetary to fiscal stimulus are on the rise, spurred by the president-elect’s campaign promises to boost infrastructure spending and cut taxes, as well as the near-certainty of the U.S. Federal Reserve raising rates in December. With trillions of dollars fleeing fixed income, equity markets have been buoyant and hopes for a resurgent U.S. economy are running high. That could have big implications for Canada — in particular, its super-heated housing market.”

Rates are rising in both the U.S. and Canada as well. From Nov. 8 to Nov. 24, Canada benchmark five-year government bond yields rose by 23 basis points, while 10-year yields rose by 28 points1. The yield curve has steepened by 22 basis points.

“Those moves reflect an underlying assumption that we are now in a regime shift, away from the post-recession falling-rate environment and towards a higherinflation, higher-rate landscape,” says Basdeo. “Should it continue, the implications of this shift will be widespread and various, but perhaps most sharply felt in the Canadian housing market.”

Canada’s housing prices have climbed steadily since if Trump follows through on promises to scrap or renegotiate the North American Free Trade Agreement, it could depress both Canadian trade and wages.

Housing demand may also dampen. For example, foreign investment restrictions provide an icy shock, resulting in fewer market entrants, fewer homeowners who can afford to refinance, or both. The housing market has accounted for a good portion of Canadian GDP growth post-recession, and so the risk is not insignificant