A tide of anti-globalization that contributes to widespread protectionism and increased tariffs can cause Canadian house prices to fall by more than 31 percent in the next five decades, according to the results of scenario evaluations by Canada’s national housing agency.
Canada Mortgage and Housing Corp., which insures mortgages against defaults, published the results Wednesday of internal modelling which tests severe financial scenarios. The situations — that include a tide of anti-globalization, a serious earthquake, steep oil price declines and a enormous housing correction — are picked as worst-case events and aren’t forecast to really happen, CMHC said.
“We seek out intense, almost unimaginable scenarios, and ask ourselves, ‘what if,'” said CMHC chief risk officer Romy Bowers. “That is the objective of our stress testing, to measure how we would stand up to those improbable shocks.”
Ms. Bowers stated CMHC added the anti-globalization situation to its testing this season since there’s been a wave of protectionist sentiment throughout the world.
“The situation we really modelled is pretty intense, but that subject was of interest to our board and management also,” she said.
The agency prediction Canadian house prices would fall by 31.5 percent during the next five years under its anti-globalization situation as unemployment rates in Canada increased to 15.3 percent in five decades.
The dramatic scenario assumes a rapid increase in U.S. interest rates and unsustainable debt levels in China would cause big demand shocks internationally, spurring greater protectionism, widespread use of tariffs and a euro-zone breakup.
CMHC forecasts its core insurance operations could see cumulative claims losses climb to $12.5-billion in total over the next five years under the protectionist situation, compared with an estimated base-case situation of claims losses at $1.7-billion under present conditions.
The situation would cause CMHC’s total profits in its insurance operations to fall to only $118-million within a five-year interval from a now predicted base case of $7.3-billion in profits within five decades.
The agency called its parallel securitization firm — that provides securitized mortgage products to investors — would really see a little improvement in profits under the anti-globalization scenario, however, because CMHC expects the program would be utilised as a policy instrument to offer liquidity to worried lenders.
However, the agency noted that under all situations it studied, it would still stay solvent, and its crucial capital ratios would remain well above required goal amounts, indicating it’s ready to withstand even extreme situations.
CMHC’s insurance protects creditors in case of loan defaults by borrowers that have insured mortgages. The stress-testing project can help to reassure banks, investors, home owners and regulators that there’ll be powerful protection for financial institutions even in severe downturns.
The bureau’s stress tests assume that if any of those studied shocks really happen, CMHC would stop paying dividends to the federal government to conserve funds.
The most serious impact for CMHC would come if Canada were to endure a serious housing correction, like the correction the U.S. confronted in 2008 and 2009, which comprised a 30-per-cent national decline in house prices and a sharp fall in employment levels.
Under the situation, CMHC forecasts house prices would fall 30 percent, unemployment rates would peak at 12 percent and it would lose $217-million more than five years since claims losses hit $11.8-billion. But compulsory capital ratios could still remain strongly positive, the agency concluded.
In 2016, CMHC examined the effects of a sudden spike in interest rates among its own stress-testing situations, assuming a 2.4-percentage-point rise in prices over two quarters would result in a serious drop in house prices and finally the collapse of a Canadian bank.
The agency didn’t include the threat in its pressure testing this season, however, although interest rates have recently started climbing and other lender Home Capital Group Inc. faced a significant crisis in the spring which threatened its viability.
Ms. Bowers stated CMHC concluded it didn’t need to redo the rate of interest scenario this year since it had fairly complete details available already. CMHC deputy chief risk officer Nadine Leblanc said the anti-globalization situation also assumed a big increase in mortgage interest rates could happen, so the effect was included in that evaluation.
Courtesy: The Globe And Mail