November 13, 2015 1:49 pm

Canada’s housing agency ‘stress tests’ 4 scenarios where market drops


The federal housing agency revealed this week it has reviewed and analyzed at least four possible scenarios in which the country’s much-fretted-over housing market could decline, potentially causing billions of dollars in mortgage losses.

Evan Siddall, head of Canada Mortgage and Housing Corp., delivered an address at a conference on Monday where he said CMHC analysts have run four “stress tests” that could upend Canadian real estate prices. Here’s each:

  • 5-year-long global slide — The world economy experiences widespread deflation over a five-year period, something that would have broad consequences for Canada’s economy, and housing market.
  • Oil staying low for (very) long — Scenario modeled on $35 dollar oil prices for the next half decade.
  • A U.S.-style crash — A scenario in which home prices fall by 30 per cent nationally and the jobless rate climbs five full percentage points (to 12.1 per cent). A collapse of that magnitude would trigger $13.2 billion in losses for the CMHC, which provides insurance on home loans for borrowers who put less than 20 per cent down on a down payment.
  • Vancouver earthquake — Certainly the most dramatic (and probably alarming) of the stress tests. A scenario in which an earthquake registering 9.0 on the Richter scale hits Vancouver, resulting in the failure of a major lender.

The first three are all to some degree inter-related. Oil slumping to $35 could well imply a global economy that’s not growing fast enough, for instance.

The CMHC president also reiterated that there remain “key data gaps” in the agency’s ability to track the housing market, chief among them, the extent to which foreign investment is driving up property values in big cities like Vancouver and Toronto.

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MORE: The Great Canadian Housing Boom 

Experts who closely watch the Canadian banking and mortgage industries and took in Siddell’s address, which was made at the Global Risk Institute’s annual conference in Toronto, said they believed it was the first time the federal housing agency had openly discussed such crisis scenarios.

“[It was] a helpful perspective,” analysts at RBC Capital Markets said in a research note. “Particularly since we think this is the first time CMHC has disclosed this publicly.”

WATCH: Some are questioning the accuracy of a new report that says mainland Chinese buyers are snapping up Vancouver real estate. John Hua explains.

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