Rating Agency Says Canadian Banks Could Survive A 25% Decline In House Prices

According to Canada’s rating agency, Moody, it was announced that Canada’s banking system wouldn’t be severely hit by the real estate crash, even in Vancouver and Toronto. However, there is speculation that the banking system could lose over $12 billion.

In the report, the rating agency expressed their concern as they made some assumptions regarding the state of the housing market and said that the country’s main banks are capable of surviving a drop of more than 25% “without catastrophic losses” to their businesses.

The rating agency arrived at a conclusion digging deep into what happened in America a while back, where the housing market crashed in 2007 inferring the information gathered to Canada.

Moody also reported that the worst-case scenario that might possibly happen in the country’s housing market is a 25% decline in the average house price, which according to CREA (Canadian Real Estate Association) is more than half a million dollars.

In the meantime, the country’s hottest housing markets including Vancouver and Toronto have declined by 35%.

If that happens, the country’s biggest banks would suffer losses of over $11 million. Plus “the majority of banks would be able to absorb losses within one-quarter of earnings,” the rating agency stated.

CMHC (Canada Mortgage and Housing Corporation) insurance a factor

The Canada Mortgage and Housing Corporation, an organization backed by the government, is responsible for insuring a majority of the mortgages in Canada. This simply means banks are legally protected in the event they default from any loans from the Housing Corporation. However, the U.S has a different system.

“The majority of Canada’s mortgage insurance backstop, provided by CMHC, is resilient,” Moody’s said.

Moody also believes that the main reason why a housing market crash would not severely hit Canada is due to the fact that the mortgage rules are better than those in the United States, and have a more reasonable rate.

“We believe several structural characteristics of the Canadian mortgage market, as well as macroprudential adjustments made by Canadian regulators following the U.S. sub-prime crisis, would help Canadian banks to weather the effects of a major housing shock,” Moody’s said.