The agency examined the exposure of Canada’s six largest banks to mortgage risk and found that household debt fuelled by mortgage credit expansion in Canada is the largest threat to credit profiles.
“These are quite high levels of debt for households and the movement in house prices, we don’t think this is sustainable in the long term,” said report author Fabrice Toka, senior director at Fitch.
The six banks have a combined $730-billion in mortgage exposure and an additional $182-billion in home equity loan exposure, the report noted.
High unemployment or interest rate shock “could aversely affect the ability of leveraged homeowners to meet their mortgage obligations,” the report said.
The risk testing scenario looked at drops of 1 to 10% and sees CIBC and RBC as the most exposed to mortgage value risks. The debt-to-income ratio in Canada is currently higher than it was in pre-recession US, but Fitch points out that there are structural differences in our housing market.
“CMHC estimates that roughly 25 per cent of condominiums in the Greater Toronto Area are sold but sitting vacant — shades of Miami at the height of its collapsed condo bubble in 2007. Other analysts say the 25 per cent figure may be too low.
“This is the ghost city phenomenon,” Mr. Holt said.
Condo developers in Eastern cities such as Toronto, Montreal and Ottawa, appear to be rushing to sell and build units before interest rates start to climb, and the market crashes.”
But if you visit that link you’ll no longer find that text and the headline has been changed to “Housing starts shoot higher on back of condo boom” (although as of this writing the URL still shows the original title). Why the dramatic change in tone?
Here’s a couple of recent stories about Canada’s Housing Agency: First off there’s the news that the government seems to be trying to figure out how to distance themselves from it, maybe by selling it off:
Anyone trying to understand the concern over a potential housing bubble in Canada need look no further than the debate among government officials over whether to exit the mortgage insurance business.
The board of Canada Mortgage & Housing Corp. considered selling the home loan insurer last year, according to former Chairman Dino Chiesa, who’s term ended in March. CMHC, set up in 1946 to promote home ownership, also studied the sale of Australia’s government-owned insurer and presented the findings to the Bank of Canada, according to documents released to Bloomberg News under Canada’s Access to Information Act.
But of course the CMHC is also saying they see ‘no sign of a market bubble’.
While the report did not make specific reference to the government’s changes in the oversight of CMHC, it did offer what could be characterized an strong validation of its role and operations.
“CMHC follows prudential regulations as set out by the Office of the Superintendent of Financial Institutions, with CMHC maintaining more than twice the minimum capital required by OSFI,” it said. “As a result, CMHC is well positioned to weather possible severe economic scenarios.”
The report also highlighted the important role CMHC plays in the housing market, which it said accounted for 20%, or $346-billion, of Canada’s gross domestic product last year. It pointed out the agency “manages its mortgage loan insurance and securitization guarantee operations using sound business practices that ensure commercial viability without having to rely on the government of Canada for support.”
You’ve probably noticed lots of eye rolling around here anytime someone mentions how Canadian banks are so different from US banks. The Canadian Centre for Policy Alternatives is now pointing out in a report that Canadian banks actually received a multibillion dollar bailout from October 2008 to July 2010. The government is being accused of offering ‘liquidity support’ that is much higher than originally reported.
All told, the study counts $114 billion worth of guarantees and financial aid for Canada’s big banks from government agencies such as the Bank of Canada and the Canada Mortgage and Housing Corp.
MacDonald combed through financial reports from government institutions as well as quarterly reports from the banks themselves.
He says the government has been obfuscating the true cost of supporting the banks.
“A healthy and resilient banking sector cannot operate under a shroud of secrecy. Details of the massive taxpayer support Canadian banks received should be released in the name of transparency and accountability,” MacDonald said.
They also point out that the heads of Canada’s big banks received large raises during the time this ‘liquidity support’ was offered.