OSFI urges some banks to stress-test a 30% drop in home prices.
Canada’s banking watchdog is requiring some financial institutions to stress-test against sharp declines in house prices in Greater Vancouver and Greater Toronto, the country’s two hottest markets.
The Office for the Superintendent of Financial Institutions (OSFI) sent out a notice to certain banks requiring them to test their resilience against a 30% drop in house prices across Canada. In particular, OSFI said these banks should stress-test a 50% plunge in Vancouver and a 40% drop in Toronto.
An OFSI spokesperson confirmed that the notice was not sent to Canada’s six largest banks.[1]
Both markets have been on the federal government’s radar for some time. The Bank of Canada in particular has warned about an overheating market in both Vancouver and Toronto and the snowball effect rapidly growing prices could have on the rest of the economy.
“In Vancouver, Toronto and their adjacent areas, strong mortgage credit growth and rapidly rising house prices are reinforcing each other, supported by low interest rates. Moreover, the share of households with large mortgages relative to income is increasing in these areas,” the Bank said in its semi-annual Financial System Review.
“Mortgage debt continues to rise among highly indebted households that have less capacity to cope financially with a loss in income or rising interest rates.”[2]
In terms of debt-to-income ratio Canadian households are the most indebted in the G7.[3] This makes Canadians especially vulnerable to sudden job loss, especially in today’s highly volatile labour market. Albertans know this all too well. Unemployment in the province surged to 7.9% in June, up from 5.8% a year earlier, as the oil-price collapse continued to take its toll. As a result, foreclosures in Calgary spiked some 30% at the end of last year.[4]
OFSI’s latest stress-test requirements likely won’t impact consumers in the short term. It does however show that regulators are becoming increasingly aware of the risks associated with cash-strapped borrowers relying on rock-bottom mortgage rates to acquire property.
Provincial governments are also looking into the matter, with British Columbia seeking to introduce a 15% tax on foreign buyers. House prices in Greater Vancouver are up 30% in one year, stoking fresh overvaluation warnings from the Canadian Mortgage and Housing Corporation (CMHC).[5]
The CMHC has assured buyers across Canada that housing markets are inherently local. The country remains home to strong real estate markets benefiting from robust local demand. It’s the foreign capital magnates of Vancouver and Toronto that require special attention.
Resources
[1] Barbara Schechter (July 26, 2016). “Canada’s financial watchdog tells some banks to test resilience to sharp drop in home prices.” Financial Post.
[2] Michael Babad (June 9, 2016). “The Bank of Canada’s warnings on frothy housing markets, and what they mean.” The Globe and Mail.
[3] Gordon Isfeld (January 19, 2016). “Canadians’ household debt climbs to highest in G7 in world-beating borrowing spree. Financial Post.
[4] Colleen Underwood (January 13, 2016). “Calgary’s foreclosures spike 30% as investors look for deals.” CBC News.
[5] CBC News (May 3, 2016). “Vancouver area benchmark house price now $1.4M, up 30% in 1 year.” CBC News.
