What if Canada experienced a major economic meltdown or a catastrophic earthquake struck Vancouver? These are just a few of the scenarios the Canada Mortgage and Housing Corporation (CMHC) is preparing for in a series of “stress tests” on the Canadian housing market.
In a rare effort for transparency, CMHC CEO Evan Siddall revealed the results of four “stress tests” during an event in New York this week, noting that housing prices could drop 26% if the price of oil stayed at $35 a barrel or below for at least five years.
A global economic deflation would be worse, lowering prices by 44% and increasing the unemployment rate to 16%.
While Siddall revealed that they briefly considered studying the effects of a possible zombie apocalypse, the more likely scenario of a 9.0 magnitude earthquake hitting Vancouver was given more attention. If, or when, the earthquake hits, Siddall says it could cause the failure of a major lender. How that might affect housing prices is so far unknown.
Another worst-case scenario is a U.S.-style housing collapse similar to what our neighbours down south experienced in 2008. If that were to take place in Canada, home prices could drop by 30%, causing $13.2 billion in insurance claim losses.
CMHC says that none of these four scenarios would put them out of business.
“Each case stresses our business differently. However, none of them depletes our capital below our 100 per cent minimum capital level, the point at which we would stop underwriting new business … The bottom line: it would take a very severe housing downturn and a big jump in unemployment rates, both persisting for a number of years, to start eroding our capital in a significant manner,” Siddall said during a November 10 meeting in Toronto.
Canada’s most overvalued real estate markets would likely be the hardest hit in any of this situations. A report from TD Bank in November revealed that B.C. was at risk of a ‘severe’ home price correction due to our inflated housing market and the high percentage of residents who spend over 50% of their salary on mortgage payments.
With oil prices continuing to fall, now sitting at a low $41.85 per barrel, there is a probable chance they could reach as low as $35 soon. But low oil prices don’t always mean the beginning of a recession; in June 2008, just a few months before the global economic meltdown, oil prices reached an all-time high at $146 per barrel. They then nosedived down to $43 by February 2009, and reached back up to $100 a barrel two years later.
Today’s price of oil has not been this low since December 2003.