Photo: James Bombales

There are plenty of ways that the American economy affects the prosperity of its northern neighbour, and it looks like a recent change in the US could start to affect the Canadian housing market.

“The magnetic pull higher from US [bond] yields is tightening financial conditions in Canada even without any change to the Bank of Canada’s policy rate,” writes TD senior economist James Marple, in a recent note.

Confused? A bond yield simply refers to the money that investors earn from holding bonds. Bond yields tend to have a parallel relationship to fixed mortgage rates — when yields are high, banks are sometimes inclined to raise fixed mortgage rates in turn.

All this to say that higher US bond yields could mean higher Canadian fixed mortgage rates in the near future.

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“Higher yields will make their way to mortgage rates, worsening affordability in a housing market that is already stretched,” writes Marple. “Data this week on existing home sales shows the market continues to struggle. Existing home sales fell 2.9 per cent in April — the fourth straight monthly decline, while average prices were basically flat at their lowest level since 2005.”

Marple says that the rise in yields has happened at a faster rate than he had initially predicted, which could add uncertainty to a housing market already facing several obstacles. Flagging sales over the past few months have been attributed to a new mortgage stress test, foreign buyer taxes and rising interest rates.

“While some reversal may take place [in the rise in bond yields], they do not help an already precarious housing outlook,” he writes.

He also notes that this development could cause the Bank of Canada to postpone interest rate hikes for the immediate future.

“Rising borrowing costs are front and center to the Bank of Canada’s economic monitoring,” he writes. “Given the level of household debt, the sensitivity of Canadian households to higher interest rates is higher than it has been historically.”

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