More headwinds are barrelling down on Canada’s housing market.

Sales in most major markets weakened in September amid a surge in new listings and softer demand, and now mortgage rates are on the march amid the global bond market rout.

Canadian government bond yields have risen to their highest since the financial crisis in recent days, and this rise could pose a big risk to the economy through its impact on the housing market, said Stephen Brown, deputy chief North America economist for Capital Economics.

Last week five-year bond yields rose to 4.4 per cent. As bond yields lead fixed mortgage rates, the increase implies that the lowest available five-year fixed rate could rise to 6.25 per cent, Brown said.

That’s a 150-basis point increase since April, which Brown says is equivalent to a hit to affordability of about 13 per cent.

Rising mortgage rates will put more buyers on the sidelines, but even before the home price outlook had deteriorated more than Capital economists had expected.

Local real estate board data out this past week show a surge of new listings with fewer buyers in September, putting the average sales-to-new listing ratio across Canada’s largest cities lower than the trough in 2022, when prices were falling, said Brown.

Capital’s current forecast for Canada’s housing market is that prices will stagnate over the next six months, “but, given recent developments, it now seems more likely that they will decline,” said Brown.

Toronto-Dominion Bank economists also see a “more pronounced and extended downturn” for the housing market than they envisioned in June because of rising bond yields.

They now see home sales and prices falling in the last quarter of this year and into 2024. By the first quarter of next year, they expect sales and prices will have declined by 8 per cent and 6 per cent, respectively, from where they were in the second quarter of 2023, said TD economist Rishi Sondhi.

Homebuyers might get some mortgage relief if Canadian bond yields start to edge down by the end of this year as the economy softens and market bets on Bank of Canada interest rate cuts increase, he said.

But the housing market’s recovery won’t be quick.

“We suspect that it will take until 2025 for Canadian home sales to sustainably surpass their pre-pandemic level,” Sondhi said.

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Economists say the latest bumper crop of jobs probably isn’t enough in itself to tip the scales to another hike by the Bank of Canada, but it sure helped build the case. The economy gained 64,000 jobs in September, about three times as many as expected, data showed on Oct. 6, and the unemployment rate held at 5.5 per cent. Economists had expected the jobless rate to tick up to 5.6 per cent.

“There will be a lot more data coming out between now and the next BoC rate decision (CPI, housing, retail sales) and the bank will likely need to see significant weakness in these reports to prevent it from pulling the trigger on another hike,” said James Orlando, TD Economics on Friday.

Get all today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.

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Segregated funds can offer professional management, diversification, principal guarantees and ease of estate planning all in one wrapper. But that comes at a cost that can be significantly higher than even traditional mutual funds. Certified financial planner Andrew Dobson tells us when and why these funds should be considered. Read more from FP Investing.

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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