The Canadian economic outlook is ‘uncertain’ and that sets a high bar for interest rate changes according to Bank of Canada Governor Poloz:
“The situation hasn’t changed much, as far as I can see,” Mr. Poloz said in the Q&A session following a speech in Toronto Monday evening.
He said the wide range of uncertainties that the bank outlined in its October rate decision, when it said it had considered a rate cut but opted to hold the line until more clarity had emerged on such issues as the U.S. election, the pace of Canadian trade, the evolution of the housing market and the impact of Canadian infrastructure spending “is still present. It’s only been a few weeks.”
Read the full article over at the Globe and Mail.
Southseacompany linked to this article in the Globe and Mail that talks about the CMHCs vulnerability to rising interest rates:
The most dramatic scenario involved a severe and prolonged global economic depression that sent unemployment soaring to 13.5 per cent and triggered a 25-per-cent drop in national home prices.
In that case CMHC said its mortgage insurance business could lose more than $3.1-billion over five years. However CMHC said it would have more than 200 per cent of its required minimum capital, even after accounting for stricter capital requirements that OSFI is expected to introduce in January. Insurance companies are required to stop writing new insurance business if their capital ratio falls below 100 per cent of its required minimum level and are insolvent when their capital levels hit zero.
CMHC’s stress testing comes amid heightened concerns over the health of the Canadian housing market. Last month, the housing agency issued its first “red” warning for Canada’s housing market as a whole, saying it now sees “strong evidence of problematic conditions” in six of the country’s largest housing markets.
In yet another scenario the Crown corporation said its insurance business would lose more than $2-billion if Canada experienced a “U.S.-style” housing correction, where home prices drop by 30 per cent and the unemployment rate rises to 12 per cent.
Read the full article here.
It’s looking like lending for real estate is going to get a bit more pricy as Ottawa tightens rules and seeks to offload some risk. Many lenders in this Globe and Mail article feel blindsided by the change and complain that it’s unfair as they will not be able to compete with the banks:
Non-bank lenders left reeling by new federal mortgage rules
The new rules kick in November 30th after which lenders will not be able to insure mortgages with amortization beyond 25 years or on homes over $1million or rental properties. I guess we’re about to find out the price of risk in these no longer covered categories.
Vancouver home sales have plunged by about a third in the last month or so, this been largely blamed on the foreign buyer tax.
But that tax focused on the city of Vancouver isn’t the only change to the real estate market, new rules and changes have the potential to affect the wider region and the nation as a whole. Southseacompany posted this summary from a Globe and Mail article in the comments:
“Four major changes to Canada’s housing rules”, Globe & Mail
1. Expanding a mortgage rate stress test to all insured mortgages.
2. As of Nov. 30, the government will impose new restrictions on when it will provide insurance for low-ratio mortgages.
3. New reporting rules for the primary residence capital gains exemption.
4. The government is launching consultations on lender risk sharing.
As Canadian Mortgage Trends puts it, is this the last nail in the coffin?
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Good news for your monday morning!
If Canada saw a ‘US-style housing crisis‘ the big 6 banks could generate enough capital in a few quarters to cover losses.
If Canada were to experience a U.S.-style housing crisis, with house prices falling by up to 35 per cent, mortgage lenders including the country’s big six banks could lose nearly $12 billion, according to a new report from Moody’s Investors Service.
CMHC would also take a hit of about $6 billion if they challenge and reject claims, but if they decided not to they would take about half the loss as it would be more evenly split between the banks and CMHC.
You probably don’t have to worry about a US-style nationwide housing crash, because we have a different mortgage market that is explicitly backed by the government. The main concern would be rate increases and job losses as Canadian debt loads continue to increase:
There was almost $1.6 trillion in mortgage debt outstanding at the end of March, including home equity lines of credit, more than double the amount outstanding 10 years ago.
Read the full article over at the Financial Post.