Sharp price drops are a distinct possibility in the event of a housing collapse similar to what the United States experienced nearly a decade ago, according to a recent analysis by Moody’s Investors Service.
In Barbara Shecter’s report for the Financial Post
, Moody’s warned that the “systemic vulnerabilities” inherent in the Canadian mortgage system would induce a strong downward pressure on prices that would lead to nearly $12 billion in losses should the country plunge into a U.S.-style financial crisis.
Moody’s noted that the Canadian system’s level of exposure to risk stems from the fact that nearly nine-tenths of the country’s mortgage holders loan from banks or co-operatives. Complicating matters is that Canada’s six biggest banks currently hold around 75 per cent of outstanding mortgage debt.
While the ratings agency stated that these institutions will not suffer a “catastrophic” impact from such a downturn, house prices could decline by 25 per cent nationwide and fully 35 per cent in the hottest markets due to the resulting aftershocks on borrowers’ purchasing power.
“In the event of a housing downturn, [the] riskier loans could exacerbate price declines,” Moody’s said, adding that a vicious cycle of defaults and mass selling would feed into the rapid fall in prices.
“When those houses are sold in foreclosure, prices of nearby properties fall…. A close analogy would be a tinder box,” Moody’s assistant vice president Jason Mercer said.
Over the past few quarters, various observers have voiced their concerns over the Canadian housing market, saying that the sustained dynamism and growth mask the overvalued, overheated, and overburdened nature of the sector, especially in Vancouver and Toronto.