Cracks in real estate market fail to rattle Canada’s big banks
Parts of Canada’s housing market are showing strain, but one group isn’t buying into dire warnings about the end of a decades-long boom: the bankers writing most of the mortgages.
A number of forecasters, including Moody’s Corp., UBS Group AG and the country’s top housing regulator, are predicting a sharp correction over the next year. Canada’s largest banks aren’t worried: on average, the six largest lenders see price declines of about three per cent over the next 12 months, according to forecasts they use to determine potential credit losses. Bank of Montreal sees no change at all in the nation’s average housing price.
Contrast that with the federal government’s Canada Mortgage & Housing Corp., which is calling for a 21 per cent plunge in prices. UBS didn’t give a specific price forecast, but it named Toronto the world’s third-most vulnerable city to a “sharp correction” in housing prices.
Some of the disparity can be traced back to the data the various groups are working from. UBS and some other forecasters are working from high-level economic and demographic figures that suggest prices are out of line with current trends in income, employment and immigration.
Canada’s banks develop their market views partially from reams of internal customer data — everything from the number and size of mortgage preapprovals working their way through the system to the flow of money through consumers’ checking accounts.
The trajectory of housing prices over the next 12 months will be critical to Canadian banks’ earnings. A strong property market has provided a reliable earnings stream for banks for decades.
Residential mortgages account for about 40 per cent of the loans at the Big Six, on average, according to a note earlier this year from Canadian Imperial Bank of Commerce. That amounted to about $1.13 trillion in Canadian residential mortgages on the books of the Big Six at the end of July, according to company filings.
“Residential mortgages up to this point have been one of the strongest-growing asset classes, and it is the largest component of their books,” said John Aiken, an analyst at Barclays Plc. “So if that all goes to zero per cent growth, they are going to have a hard time trying to squeeze out growth from other areas.”