Report by National Bank of Canada Capital Markets notes impact of changes would be limited for pre-approved buyers.

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Canada’s housing market recovery, especially in its largest cities, could be in danger as mortgage interest rates appear poised to move higher, a new report has found. National Bank of Canada Capital Markets recently published its Housing Market Monitor report, suggesting rising bond yields are likely to lead to higher mortgage interest rates.

Already, it noted Canada’s recovery in sales and prices, driven by improving conditions in Ontario this spring, has been “losing steam” in recent weeks.

It pointed to national home sales falling almost one per cent in August from July, ending a five-month streak of increased activity.

As well, the Teranet-National Bank Composite Index fell slightly in August from July after a small gain the previous month.

The report noted that the index is now at its lowest level since April 2023.

Rising mortgage costs could halt the recovery altogether.

National Bank’s report noted five-year fixed-rate mortgages, which are based on bond yields, have yet to adjust higher even as the war in Iran and other inflationary factors push bond yields higher.

The report notes, however, that could change in the coming weeks.

Variable rate mortgages also have not moved significantly higher. Those are driven by adjustments in the overnight rate set by the Bank of Canada. It currently sits at 2.25 per cent, and has not changed since October last year.

National Bank did point to a potential silver lining in the near term. It cited that the full impact of higher rates could be limited for several weeks because many borrowers have been pre-approved at lower rates.

At the same time, other borrowers may choose shorter term or variable rate mortgages, which typically come with lower interest rates in this environment.

Still, National Bank forecast that “sooner or later” higher yields in the bond market will creep into mortgage rates, posing a risk to the nation’s already stuttering housing market recovery.