Canada’s Mortgage Stress Test Starting to Reflect in Data

Steve Saretsky -

There’s a clear shift underway in the Canadian housing market. After years of borrowing and runaway price inflation, regulators seem content to shift course, at least for the time being.

It was just a few weeks ago when CIBC announced they were expecting a 50% decline in new mortgage originations later this year. Now, RBC Capital markets has also declared the best days for the Canadian mortgage lenders are in the rear view mirror. In a recent publication from RBC Capital Markets they noted, “We believe annual mortgage loan growth will likely slow from +5.3% Y/Y today to +2–3% over the next couple of years. Our forecast of slowing mortgage loan growth reflects continued weaker home sales activity and continued moderating home price appreciation.”

RBC does not expect mortgage loan growth to turn negative, noting that loan growth has only turned negative once, and that was in the early 1980’s. During which Canadian unemployment rose from 7% to 13%.

Following recent regulations, slowing home sales have become a nationwide phenomenon. Other than condo sales in Ottawa and Quebec City, home sales declined year over year across all major cities in the month of April.

Canada home sales
Source: Ben Rabidoux, North Cove Advisors

OSFI’s mortgage stress test is reflecting in more than just housing sales. High-ratio borrowers, which are considered borrowers with a loan to income above 450% and a downpayment of less than 20%, have witnessed originations cut by 54.98% since stress testing commenced.

Canada high loan to income mortgages
Source: Better Dwelling

While fewer and fewer mortgages are being dished out, RBC remains most concerned about the possibility of rising unemployment.

“We believe one of the most important drivers of whether Canada experiences a significant housing and mortgage market downturn is whether Canada experiences significant job losses. In our view, employment changes (and not home price changes) are a better leading indicator of mortgage losses. Employment growth is +1.6% Y/Y and has typically been between +1.5% to +2.0% Y/Y since the start of 2017. Historically, there has been a strong correlation between U.S. and Canadian employment growth. U.S. employment growth remains positive, which if sustained, and based on the historical relationship, indicates Canadian employment growth should remain positive, which we believe could reduce the risk of a major housing downturn with severe mortgage losses.”

RBC capital markets
Source: RBC Capital Markets

With the United States Federal Reserve recently raising rates and forecasting another two more hikes later this year it could leave the Bank of Canada in a rather precarious position. Trying to hike rates alongside their US counterparts will weigh heavily on over indebted households, but leaving rates on hold could also hit the loonie hard. Something which RBC summarizes as rather important to watch moving forward.

“In the past 5 years, home prices are +63% in Toronto, yet only +28% in US dollar terms and +31% in Chinese renminbi terms; in Vancouver, home prices are +81% in the past 5 years, yet only +42% in US dollars and +46% in Chinese renminbi. The implication is that while certain foreign investors that purchased Toronto or Vancouver real estate 5 years ago saw a more modest return in their respective local currencies, the weaker Canadian dollar might suggest some foreign buyers may find Toronto and Vancouver homes much more attractive than local buyers; however, the implementation of foreign buyer’s taxes in addition to other measures over the last two years has attempted to reduce the “attractiveness” of housing investments in Vancouver and Toronto.”


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