Sudden rise in interest rates could cause home prices to drop 30 per cent: CMHC

Federal housing agency sounds warning as it releases stress test findings on Canadian mortgages

Worries are growing that a sharp interest rate rise could deflate home prices.

TORONTO – A sudden rise in interest rates could cause house prices to plummet on average 30 per cent nationally, according to stress tests performed by Canada’s federal housing agency released Thursday.

Canada Mortgage and Housing Corp. said it studied the impact of two interest rate hikes – a one percentage point increase over one quarter this year, followed by a 1.4 percentage point rise during one quarter next year.

CMHC said its mortgage insurance business would incur $1.13 billion in losses in such an event but that it could withstand the hit. A spokesman for the agency stressed that the scenario is an “extreme case” and would be unprecedented.

Interest rates have started to go up this week as a sell-off in the U.S. bond market has driven bond yields higher, making it more expensive for banks to access capital.

Two of Canada’s biggest banks – TD Bank (TSX:TD) and Royal Bank (TSX:RY) – have hiked their fixed mortgage rates, anywhere from 0.05 percentage points to 0.4 percentage points.

There are concerns that as interest rates rise, some Canadian homeowners could encounter difficulty making their mortgage payments and face the risk of default.

“Households are so leveraged right now and house prices are at such incredibly high levels relative to household incomes,” said David Madani, senior Canada economist at Capital Economics.

“Even a moderate doubling in interest rates – which sounds like a lot but we’re talking about maybe 200 basis points (two percentage points) – could potentially pop the housing bubble.”

Interest rates have been trending lower for more than a decade, but that has not always been the case.

Fuelled by inflation, mortgage rates soared in the 1980s and posted five-year fixed rates topping more than 20 per cent in 1981.

According to data kept by the Bank of Canada, the posted five-year rate for a conventional mortgage at the big Canadian banks climbed from 13.25 per cent in January 1980 to 16.75 per cent in April 1980, an increase of 3.5 percentage points.

However, Canada started using an inflation target to guide monetary policy in 1991 and since then inflation has been mostly tamed and interest rates have fallen.

The stress test conducted by CMHC was one of several extreme scenarios it examined over a time period from 2017-2021. They included a U.S.-style housing correction, a high-magnitude earthquake that destroys critical infrastructure in a major Canadian city and a drop in oil prices where they fall to US$20 per barrel next year and remain between US$20-30 for another four years.

Another scenario that the agency tested involved a “severe and prolonged” economic depression, which CMHC said would see house prices drop 25 per cent and unemployment rise to 13.5 per cent. The insurer said it would incur $3.12 billion in losses in that case.

CMHC said its capital holdings were sufficient to withstand all scenarios it tested. None of the scenarios should be considered a prediction or forecast, the agency added.

“Stress testing involves searching out extreme scenarios that have a very remote chance of happening and planning for them,” Romy Bowers, CMHC’s chief risk officer, said in a statement.

“Rigorous stress testing is an essential part of our risk management program and allows CMHC to evaluate its capital levels against these scenarios.

– Alexandra Posadzki, The Canadian Press

Just Posted

Not everybody is a fan of self-checkouts

Abbotsford Walmart among locations that have boosted their use

Dense fog a challenge for westbound drivers on Highway 1

Crash in Abbotsford just East of Bradner Road

Abbotsford restaurant offering free meals for those unable to pay

Veerji Fish ‘n’ Grill on Clearbrook Road has been giving away food since the summer

Can protected bike lanes get more kids cycling to school in Abbotsford?

Planners hope safer bike facilities can encourage pint-sized commuters to hit the road on two wheels

Third instance of Trudeau in skin-darkening makeup emerges

Another instance of Trudeau using makeup to darken his face has emerged, within 24 hours of the first

35 of 87 dogs in 2018 Williams Lake seizure were euthanized due to behavioural issues, BCSPCA confirm

The dogs did not respond to the behaviour modification and remained terrified of humans

‘We still did not get answers’: Vancouver parents demand expulsion after students’ racist video

‘We were unable to get confirmation from the VSB, but he hasn’t returned as of yet,’ says Marie Tate

B.C. ‘tent city’ disputes spark call for local government autonomy

UBCM backs Maple Ridge after province overrules city

B.C. drug dealers arrested after traffic stop near Banff turns into helicopter pursuit

Antonio Nolasco-Padia, 23, and Dina Anthony, 55, both well-known to Chilliwack law enforcement

‘What goes up will come down’: Gas prices spike in Metro Vancouver

Petroleum analyst Dan McTeague says prices will fall Thursday

B.C. MLA calls on province to restrict vaping as first related illness appears in Canada

Todd Stone, Liberal MLA for Kamloops-South Thompson, introduced an anti-vaping bill in April

Most Read