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What would happen to Canadian home prices if interest rates spiked? How about in the event of a high-magnitude earthquake that wreaks havoc in one of the country’s biggest cities?
These are two of several hypothetical scenarios the Canada Mortgage and Housing Corporation, Canada’s national housing agency and a mortgage loan insurance provider, explores in its 2016 stress test.
“Stress testing involves searching out extreme scenarios that have a very remote chance of happening and planning for them,” says Romy Bowers, CMHC’s chief risk officer.
A surge in interest rates resulting in higher borrowing costs and the failure of at least one Canadian financial institution could mow down home prices by 30 per cent, CMHC estimates in results published today.
The Crown corporation notes that none of the test results are predictions or forecasts. All apply to the 2017-2021 period, for which base-case price growth is pegged at 9 per cent barring these stress-testing scenarios.
In the case of a richter-scale-rocking quake striking a major Canadian urban centre, Canadian home prices could fall 0.6 per cent in the worst case considered.
A handful of Canadian cities have considerable sway on national home prices. For instance, the countrywide average hit $481,994 last month, according to the Canadian Real Estate Association, but if Greater Vancouver and Greater Toronto are excluded, it was $361,012.
Other scenarios explored include severe economic depression lasting several years and an oil price shock that sees oil prices bottom out at $20 (in US dollars) per barrel next year and hover between $20 and $30 until 2022.
In the economic depression scenario, prices drop 25 per cent, while the oil crisis clips prices by 7.8 per cent.
CMHC’s capital holdings would allow the agency to withstand even “the most extreme scenarios,” it says.
“Rigorous stress testing is an essential part of our risk management program and allows CMHC to evaluate its capital levels against these scenarios,” Bowers adds.