Decrease home price, increase unemployment rate factors might to upset banks’ balance sheets ? analyst
Falling home prices, unemployment to upset banks’ balance sheets ? analyst
Ephraim Vecina
Mortgage Broker News
With the looming threat of major home-price drops, a housing market correction accompanied by mounting unemployment will likely take a significant chunk off Canadian banks’ bottom lines, according to Barclays Plc. analyst John Aiken.
Moody’s Analytics said in mid-October that economic contraction and lower incomes stemming from the COVID-19 pandemic will trigger declines of 6.7% in single-family home prices and 6.5% in condo values.
The Canada Mortgage and Housing Corporation made a more troubling prediction of a 9-18% home-price drop this year.
In an interview with Bloomberg News, Aiken cited a CIBC report estimating that residential mortgages accounted for around 40% of loans at the Big Six banks. This translated to approximately $1.13 trillion in mortgages at the Big Six as of the end of July.
But with a troubling number of financially struggling Canadians unable to make any home purchases in the first place, the market’s prospects appear dim.
“Residential mortgages up to this point have been one of the strongest-growing asset classes, and it is the largest component of their books,” Aiken said. “So if that all goes to 0% growth, they are going to have a hard time trying to squeeze out growth from other areas.”
However, several observers have taken issue with the doom-saying surrounding Canadian home prices, and especially with the CMHC forecast.
“While I can appreciate some of the reasoning that went into CMHC’s prediction, especially in the spring when so much was still unknown, the market data doesn’t support such a steep price decline, especially with the two largest real estate markets of Toronto and Vancouver continuing their upward momentum,” said Christopher Alexander, executive vice president and regional director of RE/MAX Integra’s Ontario-Atlantic Region. “The Prairies are facing different circumstances and challenges due to the resources sector, but Ontario and BC are expected to offset slower activity in Saskatchewan and Alberta.”
Sherry Cooper, chief economist at Dominion Lending Centres, also deemed the CMHC predictions “overly pessimistic” considering that the national average home price saw a 1.5% increase as recently as August.
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