After a year which tallied record home sales and prices, Bank of Canada Governor, Tiff Macklem, is beginning to take notice. In a recent video conference, Macklem stated, “We are starting to see some early signs of excess exuberance. But we’re along ways away from where we were in 2016/17 when things were really hot.”

Of course if you’re taking part in the housing market today, you’re probably more in tune than governor Macklem. Today’s bidding wars have stoked a frenzy, as panicked buyers push prices to dizzying heights. You could certainly argue the exuberance today is stronger than in 2016/17. The housing market has been set a blaze and is in desperate need of a fire extinguisher, and it might just get it through higher borrowing costs.

Inflation expectations are surging, as there’s a collective bet that government stimulus plus near-zero interest rates will fuel demand, and generate inflation. This is pushing the price of commodities higher, the Bloomberg Commodity Spot Index, which tracks price movements for 23 raw materials, rose to its highest levels since March 2013. The gauge has already gained more than 60% since reaching a four-year low in March 2020. Meanwhile, lumber prices have hit $1,000USD per thousand board feet, an all-time high, while adding thousands of dollars to building costs.

Inflation is here, or at least the market thinks so. As a result, bond yields are beginning to back up globally. The ramifications back home, means the Canada 5 year bond yield, which is used to price the popular 5 year fixed mortgage, has been moving higher in recent weeks. In fact, the 5 year bond yield is now back at pre-pandemic highs. This has resulted in a 30-40 basis point increase in typical fixed rate mortgages. Again, if there’s one way to slow the housing market its through higher mortgage rates.

For now the move is probably welcoming, but rest assured the Bank of Canada is watching. Remember, at the onset of the pandemic the Bank pleaded with Canadians to borrow money, ensuring that rates would stay low for a very long time, that they should have full confidence the bank was behind them. The Bank followed up on that pledge by aggressively buying 5-10 year debt in order to push borrowing costs down. Now what ?

Nobody is prepared for mortgage rates to climb from 1.5% to 3%. I think we will see, once again, that there is no such thing as a free market. Central banks will do their best to quash the recent move in bond yields. Whether or not they’ll be successful is another story, and one that is critical to maintaining the housing boom.

Three Things I’m Watching:

1. Lumber futures climbed to a record $1,004.90 per 1,000 board feet. Prices have climbed about 40% this year. (Source: Bloomberg)

2. The Canada 5 year bond is moving higher, repricing mortgage rates.

3. Commodity prices are up over 60% as inflation expectations soar. Source (Ice Cap Asset Management)