January 30, 2023


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Cracks in real estate market fail to rattle Canada’s big banks

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Toronto, Canada’s largest housing market, was the No. 3 city on UBS’s Real Estate Bubble Index, released last month. The index tracks the risks of property-price bubbles in global cities based on factors like price-to-income ratios, construction levels and gross domestic product.

One of the biggest bears has been the CMHC, the nation’s housing agency and the main provider of mortgage insurance. The group released a forecast in May that predicted an average price of $460,292 in the first quarter 2021. Given the average price of a house in August was $586,000, prices would need to plunge 21 per cent by the end of next March to line-up with the forecast.

While CMHC Chief Economist Bob Dugan officially reiterated that forecast last month, the organization has since suggested there may be room to soften its view. The original forecast was based on data available in April, Deputy Chief Economist Aled ab Iorwerth said, and the CMHC has since learned more about people’s economic reaction to the crisis.

“That has led to some changing of minds,” he said in an interview. “But we are also still facing some of the risks we talked about in April, and I’m not sure we’re out of the woods on those risks.”

Bottom Line

While a 20 per cent drop in housing prices would hurt the banks’ earnings, it would be unlikely to damage their balance sheets unless it was accompanied by a sharp increase in unemployment that hurt the ability of borrowers to pay their mortgages, Aiken said.

Even then, the banks are adequately provisioned for potential loan losses and many of their mortgages are insured by CMHC or other insurance providers, he stressed. In most provinces, lenders are also able to make claims on the other financial assets of borrowers, should they default.

Banks also have access to data including the balances of borrowers’ investment portfolios and chequing accounts.

“They have an exceptionally solid idea not only what your balance sheet is but also what your spending habits are,” Aiken said. “They have the best information out there.”