Canada’s Mortgage Stress Test and Declining Home Prices

The Vancouver and Canadian housing markets are beginning to shift. After years of borrowing and price inflation, regulators are beginning to shift course. CIBC recently announced they are expecting a 50% decline in new mortgage originations later in 2018. Slowing mortgage loan growth reflects weaker and less frequent home sales activity. While CIBC does not expect mortgage loan growth to turn negative, slowing home sales have become a nationwide phenomenon. The impact is especially felt in Vancouver, which recently registered the worst affordability levels ever recorded in Canada. In fact, the National Bank of Canada found Vancouver affordability to be at the worst levels since 1980.

The mortgage stress test, however, tests more than just housing sales. High-ration borrowers, which are those with a loan to income radio of above 450% and a down payment of less than 20%, have seen originations cut by almost 55% since the stress testing began. In Vancouver, housing affordability remains at crisis levels. Vancouver detached homes have reached 116.5 on the affordability index, registering a 2.1% increase each quarter. It currently sits at 69% above the historical average, which dates back to 1985. Based on the average household income of $79,000, the typical household in Greater Vancouver can no longer afford a one-bedroom condo.

The Bank of Canada is also in a difficult position. The United States Federal Reserve is continuing to raise rates and has forecasted another two hikes later this year. If the Bank of Canada hikes rates in step with the United States, indebted households—of which there are many—will be hit hard. However, neglecting to raise the interest rates might depreciate the value of the Canadian dollar.

Canada—the Vancouver area, in particular—seems to be on the verge of a housing crisis and potential economic collapse. In April of 2018, the Bank of Canada reported $251 Billion in personal debt borrowed against Canadian homes. With much of the country’s economy tied up in real estate, a bursting housing bubble could mean widespread layoffs and a national economic collapse.