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Strong Mortgage Regulations Make Canada Resilient to Housing Crisis: Moody’s

26 June 2016

Rock-bottom interest rates are driving an unprecedented housing boom that has many economists worried about an overvalued market. But a recent report from Moody’s suggests Canada is more than capable of withstanding a market correction without a US-style recession.

Despite all the concerns surrounding Canada’s housing market, the country’s lenders are well positioned to absorb even a large-scale housing crisis “without catastrophic losses” to their underlying business, according to a new report from Moody’s, a US-based credit rating agency. Moody’s so-called stress test wasn’t lenient, either, as it assumed a decline of 25% or more in average national house prices. Even under such a pessimistic assumption, Canada’s lending market would land on its feet, despite nearly $12 billion in estimated losses.

“Although increasing household debt and rapidly increasing house prices in Canada demonstrate conditions similar to those in the U.S. prior to the financial crisis, the seven largest Canadian mortgage lenders have the capacity to absorb a similarly pronounced mortgage loan shock without catastrophic losses,” Moody’s said in a report released on June 20.[1]

Moody’s Cites Strong Regulatory Environment

According to Moody’s, Canada’s resilience is largely due to a strong regulatory environment, which would likely backstop any potential run on its housing market. Since 2008, the federal lawmakers have made several changes to government-backed insured mortgages, including reducing amortization periods and raising the minimum down payment required to purchase a home. In 2012, regulators also put in place new guidelines governing home equity lines of credit.[2]

Moody’s also cited a government-backed insurance program as one of Canada’s biggest advantage in withstanding a price shock. The Canadian Mortgage Housing Corporation (CMHC), a Crown corporation based in Ottawa, insures the majority of mortgages in Canada.[3]

Market Defies Government Warnings

The Bank of Canada (BOC) has repeatedly warned about the risks of an overvalued housing market, referencing cities such as Toronto and Vancouver in its analysis of what it considers to be unsustainable price growth. At the same time, however, the Bank continues to implement rock-bottom interest rates to stimulate an otherwise moribund economy struggling with high unemployment and weak oil prices, not to mention a prolonged bear market in its mining industry. As it currently stands, housing is one of the few drivers supporting the Canadian economy.[4]

Household Debt Raises Red Flags

One of the major concerns for policymakers continues to be rising household debt. Moody’s cited higher debt burdens as a major concern, and rightly so. Between 2000 and 2014, Canadian household debt relative to income has increased by 50%.[5] Other estimates show that Canada has the highest debt-to-income ratio in the G7.[6] Yet, Canadians are still flocking to purchase homes. This suggests that Canadians may be earning additional income through outside work or so-called fractional employment. We talk more about this phenomenon in a separate article.

Interest Rates Not Going Anywhere Any Time Soon

Canada’s fragile economy will keep interest rates near rock-bottom for the foreseeable future. The Bank of Canada is unlikely to raise interest rates any time soon, providing more impulsion for home owners to tap into their existing equity to either upgrade or downsize.

While Canada may be in a position to withstand a housing correction, recent price gains have made one thing abundantly clear: first-time homebuyers are at a decided disadvantage. The combination of lower entry level incomes and scarcer full-time permanent employment are making it even more difficult for young people to buy their first home. This is one cohort of the population that appears least likely to be enticed by low interest rates.



[1] David Berman (June 20, 2016). “Canada’s big banks could withstand a severe housing crash: Moody’s.” The Globe and Mail.

[2] Canadian Bankers’ Association (December 30, 2015). “Changes to Canada’s Mortgage Market.”

[3] CBC News (June 20, 2016). “Canadian banks could survive a 25% house price decline, Moody’s says.” CBC.

[4] Midas Letter (June 22, 2016). ‘Canada’s ‘hands-off’ housing policy is right move in free market economy.” Financial Post.

[5] (July 30, 2015). Credit Cards: Statistics and Facts.

[6] Gordon Isfeld (January 19, 2016). “Canadians’ household debt climbs to highest in G7 in world-beating borrowing spree.” Financial Post.

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