If Canada’s housing market experiences the price correction so many analysts and institutions expect, it won’t just hurt the homeowners who bought overpriced properties. It’ll directly impact Canada’s banks, who would lose tens of billions of dollars with even a modest market correction, says a new report from Fitch.
Despite this warning, mortgage lenders are now fighting new restrictions meant to make lending more responsible in Canada, saying some Canadians could lose their homes if the rules come into force.
Fitch Ratings Agency ran stress tests looking at the banks’ exposure to mortgages, and found that a 10 per cent decline in the value of the mortgages would cause $91.3 billion-worth of damage to the biggest six banks. But that number would drop to $41.5 billion once insurance policies from government-controlled agencies, such as the CMHC, pay out.
Fitch found RBC and CIBC to be the most exposed to a house price shock, “given the size of their domestic mortgage books relative to their lending.”
BMO and TD bank were ranked as the least exposed, given their relatively low reliance on mortgages, while Scotiabank and the National Bank of Canada fell somewhere in between.
In all, Canada’s banks have $912 billion of exposure to the domestic mortgage market, Fitch found.
The federal government has taken incremental steps to cool down Canada’s heated market without sending it into a tailspin. The maximum insurable mortgage has been reduced from 35 years to 30, and the maximum a mortgage can be insured for has been reduced to 85 per cent of the home’s value, from 90 per cent.
Despite this, Canada’s housing market continues to boom, with only Vancouver, and its sky-high prices, showing recent signs of weakness.
Yet despite the growing alarm about an overheated housing market, Canada’s mortgage brokers are lining up against the reforms.
A new rule proposed by the Office of the Superintendent of Financial Institutions (OSFI), which recently took greater control of mortgage regulation, would require banks to check up on the financial stability of homeowners when they want to renew or refinance their mortgage. Currently, they only look at payment history.
The Canadian Association of Accredited Mortgage Professionals (CAAMP) told the Globe and Mail the new rules could result in people losing their homes.
If the rules come into force, “homeowners who have been in compliance may no longer qualify,” CAAMP wrote in a submission to OSFI. “This would result in a number of properties hitting the market at the same time and thereby driving down prices.”
The lenders' objections came ahead of a new OECD report stating that Canada's new, stricter mortgage rules won't be enough to cool down major overheating markets like Toronto. The OECD suggested the Bank of Canada start raising interest rates this fall.
In a sign of how dependent Canada’s banks are on consumer loans, analysts are saying they expect banks to have a harder time growing profits now that Canadians are pulling back on debt spending. (The average Canadian household now carries 150 per cent of its annual income in debt, but alarm over this fact appears to have caused consumers to pull back on borrowing recently.)
“The Big Six Canadian banks will suffer from the impending completion of a near 15-year expansion in Canadian household leverage,” National Bank Financial analyst Peter Routledge said in a research note quoted by the Globe and Mail.
Despite the crisis in Europe and China’s economic slowdown, “perhaps the biggest headwind [for banks] is found close to home,” Sumit Malhotra of Macquarie Equitities Research said, as quoted at the Globe. “The key question … is whether the banks can outperform when their largest source of revenue – consumer loan growth – is showing clear signs of slowing.”
[Text versions of slideshows follow below]
The number shown is the housing affordability ratio -- a measure that shows how much a median home costs relative to median incomes in a given city. Historically, a typical ratio has been around three.
2008 Canadian Bank Bailout: What Each Of The Banks Got
5. BMO: $17 Billion
The financial support extended to BMO amounted to 118 per cent of the bank's value at the time, according to the CCPA.
4. CIBC: $21 Billion
The financial support extended to CIBC amounted to 148 per cent of the bank's value at the time, according to the CCPA.
2. (tie) RBC: $25 Billion
The financial support extended to RBC amounted to 63 per cent of the bank's value at the time, according to the CCPA.
2. (tie) Scotiabank: $25 Billion
The financial support extended to Scotia amounted to 100 per cent of the bank's value at the time, according to the CCPA.
1. TD Bank: $26 Billion
The financial support extended to TD amounted to 69 per cent of the bank's value at the time, according to the CCPA.
The 10 Least Affordable Cities For Housing
10: New York City - 6.2
9: Auckland, New Zealand - 6.4
8. Adelaide, Australia - 6.7
7. San Francisco - 6.7
6. London - 6.9
5. San Jose, California - 6.9
4. Melbourne, Australia - 8.4
3. Sydney - 9.2
2. Vancouver - 10.6
1. Hong Kong - 12.6