The most striking demonstration of this development is CIBC’s situation, Shanahan observed. By the quarter ending July 2016, residential mortgage loans represented 62 per cent of the bank’s overall loans—and this poses an incredible risk considering Canada’s ever-rising costs of living.
“They have taken these loans and underwritten more of them at a point in the cycle where households are more leveraged and home prices have been the highest. They have been lending to consumers who are the most exposed and stretched,” Shanahan told the Vancouver Sun.
All in all, loans made by the Canadian banking system to home mortgages comprise 47 per cent of their total. More than half of said loans are uninsured, Shanahan said.
“Residential mortgages are a huge part of the financial economy,” University of B.C. economist Tom Davidoff agreed. “In a downturn, at minimum, many lenders lose a source of profits and could lose money servicing and taking losses on defaults.”
However, while these signs seem troubling indeed, other experts assured that only a major crash accompanied by a “delayed deterioration of credit” would make banks suffer significant losses.
“You wouldn’t have folks defaulting right away. There are additional source of liquidity and with interest rates so low, it’s easier to carry your debts,” National Bank
analyst Peter Routledge said.
“In my view, for the next two months, we can’t take the [residential real estate sales in Metro Vancouver] data too seriously because it is so distorted by behaviour in response to the [new property transfer] tax [for non-Canadian buyers.] I have to remind myself to take a breath. There will more clarity in the new year.”
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Underscoring the central role that real estate is now playing in the Canadian financial system, Edward Jones analyst Jim Shanahan noted that the Big Six is exposed to home-backed loans worth $1.1 trillion as of the end of April.