Home prices continue to hit new highs which could cause challenges for Canadian banks if there is a severe economic shock, according to Fitch Ratings‘ latest North American FI Chart of the Month. Banks with more mortgage exposure to greater Toronto and Vancouver may be more sensitive to any rapid market correction in these two markets.
“Home price growth in Toronto and Vancouver is outpacing fundamentals however most Canadian banks should be able to withstand a market correction, but in the event of an adverse unemployment shock or rapid rise in interest rates, banks could be more heavily impacted,” said Doriana Gamboa, senior director, Fitch Ratings.
In the event of a severe economic shock, Fitch expects that Canadian Mortgage and Housing Corporation (CMHC) would act as a shock absorber for the insured mortgage exposure, which is about an average 55% of total mortgage exposure for the Big Six. Ratings could be affected in such a scenario; however, Fitch believes banks have adequate capital cushions to absorb this risk.
“Recent attempts by federal, provincial and local governments to cool the housing market through various measures, so far have not dampened prices and risks may escalate for banks, though given healthy capital levels a modest correction would be manageable,” added Gamboa.
The big six Canadian banks still dominate the housing sector and Fitch does not see this changing even with the rise of the nonbank mortgage sector. Currently, nonbank mortgage companies account for 13% of the $1.4 trillion mortgage market. With eyes on Home Capital Group (HCG), the largest alternative mortgage lender, Fitch notes that the liquidity issues are specific to its business model and current credit measures do not suggest asset quality problems.
“It’s unlikely that nonbank mortgage companies will dominate the housing sector anytime soon as the tightening of CMHC mortgage insurance rules implemented in October 2016 impacted a significant funding source for mortgage companies,” concluded Gamboa.
