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

13-year-old Langford boy missing

West Shore RCMP say Alex Meickle was likely headed to Tofino

Oak Bay volunteer and sustainability professional throws his hat in the ring for municipal election

‘We can retain what makes Oak Bay great while planning for a future that’s even better,’ says Appleton

Salmon Fest swims into Oak Bay Saturday

Family event raises money for Kiwanis Pavillion

Oak Bay High washes cars for kids

Annual Tour de Rock fundraising car wash hits the lot Saturday at Oak Bay High

UVic chemist claims international prize for ‘reversible’ preservative

University of Victoria green chemist and civil engineer Heather Buckley led a… Continue reading

Reader photos: Greater Victoria’s hazy skies

Lingering smoke from wildfires contributed to the province issuing a smoky skies bulletin

Greater Victoria Crime Stoppers wanted list for the week of Aug. 14

Greater Victoria Crime Stoppers is seeking the public’s help in locating the… Continue reading

VIDEO: Post-surgery monologue comedy gold

If you’ve ever had surgery with anaesthetic you know the coming out of it process can be a treat.

LETTERS: Doctors speak out on surgical wait times for B.C. patients

‘Governments know they will lose private clinic lawsuit’

Thieves steal supplies, tools and juice boxes from B.C. summer camp

‘Take a moment to think about who you stole from,’ says Burns Bog Society’s Mark Robertson

Women-owned businesses generate $68,000 less revenue than men’s: survey

When Dionne Laslo-Baker sought a bank loan to expand her burgeoning organic popsicle and freezies business in 2014, she was “shocked” by the feedback she received from one of the bankers.

Hedley frontman’s alleged sex offences case returns to court

Jacob Hoggard faces three sexual assault-related charges will return to a Toronto courtroom this morning.

Most Read