Moody's warns fixed mortgage rates could rise in 2027 despite steady Bank of Canada
The forecast says demand for AI investment is pushing bond yields higher, which will likely push up mortgage rates.
A new forecast from Moody's Analytics warns that fixed mortgage rates could climb next year even if the Bank of Canada holds its key interest rate steady. The report, released by RPS Real Property Solutions, attributes the potential increase to rising bond yields driven by demand for artificial intelligence investment. Governments and companies financing AI projects are pushing those yields higher, the report says. "Mortgage rates are likely to follow," it concludes, noting that bond yields are a primary factor lenders use to set fixed mortgage pricing.
Higher borrowing costs are expected to dampen housing demand following a loss of momentum last quarter. National home resales dropped 2.3 percent between August and September, according to the report. The RPS House Price Index finished the third quarter 1.1 percent lower than a year earlier. Despite this, Moody's still predicts a "slow and modest" price recovery in 2027, though it has revised its forecast downward. The firm anticipates hiring will improve after a sluggish start to the year.
Price gains will be uneven across the country, with Ontario and British Columbia projected to trail other regions. Toronto and Vancouver are especially likely to see limited increases due to poor affordability and weak demand. Quebec and parts of the Prairies are forecast to perform better. A slowdown in homebuilding could provide some support for prices by restricting new supply, the report added.
The outlook assumes the federal ban on foreign buyers of existing homes will expire as scheduled at the beginning of 2027. The government's 2026 budget proposes extending the prohibition while exempting new construction. Moody's believes the ban's lapse would have only a modest impact on prices in major cities, given the historically small share of purchases by foreign buyers. This forecast follows other recent signals of a cooling market. Your Space Hamilton reported in October that national sales and benchmark prices fell in September amid higher mortgage costs.
With files from Canadian Mortgage Trends