Interest Rate Signals, What They Mean for Apartment Investors

Over the past two years, yields on the 1-year and 5-year Government of Canada (GoC) bonds, along with the Bank of Canada (BoC) overnight rate, had all been trending downward, as investors anticipated rate cuts driven by cooling inflation and slowing growth. However, in recent months, we’ve seen a reversal. This spring, the 5-year GoC yield crossed above the 1-year yield, a key signal that markets were starting to walk back expectations of imminent rate cuts. Since then, the upward momentum has continued, and the 1-year yield is now poised to cross the BoC overnight rate, another sign that rate cuts are being pushed further into the future. In my opinion, this steepening of the yield curve reflects that markets expect interest rates to stay higher for longer.

To understand what is behind the shift, we don't have to look much further than the recent tariff tensions and trade policy shocks. The trump administration has continued to muddy the waters, proposing new tariffs key materials like steel, aluminum, and finished construction goods. Canada, heavily reliant on U.S. trade, is already seeing the impact in its currency and inflation outlook. This uncertainty is a strongly contributing factor to the stickiness of inflation, and the Canadian economy continues to show resilience. These conditions have delayed the Bank of Canada’s timeline for easing, while bond investors are demanding higher yields to compensate for inflation and uncertainty. As a result, the 5-year GoC bond yield has risen from about 2.5% in April to nearly 2.9% as of July, pushing up mortgage rates and reducing affordability. Analysts note this is starting to squeeze demand and tighten underwriting for both homebuyers and real estate investors (Mortgage Sandbox, 2025).

Real Estate Implications for Apartment Investors

For multifamily real estate investors, particularly those relying on CMHC-insured or fixed-rate debt, these shifts carry meaningful consequences. First, borrowing costs are likely to remain elevated, and the move in 5-year bond yields directly affects CMHC-insured mortgage pricing. With longer-term debt more expensive, investors may face reduced leverage, higher DSCR thresholds, and tighter debt coverage cushions. Second, if interest rates remain high while NOI growth slows, cap rates could rise, putting downward pressure on asset values, especially for investors who acquired properties at compressed yields expecting a quick drop in rates. Third, tariffs on imported materials risk driving up construction and renovation costs, particularly in provinces like Quebec and Ontario. According to Desjardins, these regions are especially vulnerable to U.S. protectionist moves given their exposure to cross-border supply chains. Lastly, while rising costs could delay new development, that could also tighten supply, helping maintain rent growth in high-demand urban markets. Well-located, stabilized assets with low turnover and good tenant profiles may outperform in this environment.

It seems to me that the bond market is sending a message that apartment investors need to adjust underwriting assumptions, revisit refinancing timelines, and prepare for prolonged capital market uncertainty. Add to that the growing volatility in trade policy and tariffs, and it's clear that the second half of 2025 will require discipline, flexibility, and careful attention to macro risks.

Sources

1. “Canadian dollar extends monthly decline as trade deal prospects dim.” Reuters, July 31, 2025. Link

2. “Canada holds out hope of trade deal as US talks tough on tariffs.” Financial Times, July 30, 2025. Link

3. “Rising Bond Yields Threaten Canadian Housing Affordability.” Mortgage Sandbox, July 2025. Link

4. “Canada: Tariffs and Homebuilding Risk.” Desjardins Economic Studies, April 8, 2025. Link