A Canadian housing crash in the vein of the U.S. subprime mortgage crisis a decade ago will not prove entirely disastrous to the nation’s seven largest lenders, according to a new stress test by Moody’s Investors Service.
“Banks are in better shape than two years ago,” Moody’s senior analyst Jason Mercer said during the release of the test’s results earlier this week, as quoted by Bloomberg.
“Our stress results indicate banks would experience higher losses… because house prices have continued to increase and mortgage loans have grown,” Mercer added. “However, the banks have increased their capital buffers during that time and are now in a stronger financial position to weather such losses.”
This, despite approximately 50% of domestic banking volume being comprised of residential mortgage loans, and despite aggregate potential losses for the largest lenders reaching a monstrous $14.3 billion this year, Moody’s estimated.
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Moody’s noted that the marked increase in possible losses – which shot up from $12.1 billion in 2016 – came about as a result of the growing proportion of uninsured mortgages, which incur larger losses in default.
The credit rating company also cited as a risk factor the influence of steadily increasing home prices and large mortgage lending volume – which in turn was triggered by the record-low interest rates that prevailed over the past few years.
Wage levels exacerbating Vancouver’s housing situation
Current price correction in Ontario not similar to previous bust periods – CMHC