Sudden rise in interest rates could cause home prices to drop 30 per cent: CMHC

Federal housing agency sounds warning as it releases stress test findings on Canadian mortgages

Worries are growing that a sharp interest rate rise could deflate home prices.

Worries are growing that a sharp interest rate rise could deflate home prices.

TORONTO – A sudden rise in interest rates could cause house prices to plummet on average 30 per cent nationally, according to stress tests performed by Canada’s federal housing agency released Thursday.

Canada Mortgage and Housing Corp. said it studied the impact of two interest rate hikes – a one percentage point increase over one quarter this year, followed by a 1.4 percentage point rise during one quarter next year.

CMHC said its mortgage insurance business would incur $1.13 billion in losses in such an event but that it could withstand the hit. A spokesman for the agency stressed that the scenario is an “extreme case” and would be unprecedented.

Interest rates have started to go up this week as a sell-off in the U.S. bond market has driven bond yields higher, making it more expensive for banks to access capital.

Two of Canada’s biggest banks – TD Bank (TSX:TD) and Royal Bank (TSX:RY) – have hiked their fixed mortgage rates, anywhere from 0.05 percentage points to 0.4 percentage points.

There are concerns that as interest rates rise, some Canadian homeowners could encounter difficulty making their mortgage payments and face the risk of default.

“Households are so leveraged right now and house prices are at such incredibly high levels relative to household incomes,” said David Madani, senior Canada economist at Capital Economics.

“Even a moderate doubling in interest rates – which sounds like a lot but we’re talking about maybe 200 basis points (two percentage points) – could potentially pop the housing bubble.”

Interest rates have been trending lower for more than a decade, but that has not always been the case.

Fuelled by inflation, mortgage rates soared in the 1980s and posted five-year fixed rates topping more than 20 per cent in 1981.

According to data kept by the Bank of Canada, the posted five-year rate for a conventional mortgage at the big Canadian banks climbed from 13.25 per cent in January 1980 to 16.75 per cent in April 1980, an increase of 3.5 percentage points.

However, Canada started using an inflation target to guide monetary policy in 1991 and since then inflation has been mostly tamed and interest rates have fallen.

The stress test conducted by CMHC was one of several extreme scenarios it examined over a time period from 2017-2021. They included a U.S.-style housing correction, a high-magnitude earthquake that destroys critical infrastructure in a major Canadian city and a drop in oil prices where they fall to US$20 per barrel next year and remain between US$20-30 for another four years.

Another scenario that the agency tested involved a “severe and prolonged” economic depression, which CMHC said would see house prices drop 25 per cent and unemployment rise to 13.5 per cent. The insurer said it would incur $3.12 billion in losses in that case.

CMHC said its capital holdings were sufficient to withstand all scenarios it tested. None of the scenarios should be considered a prediction or forecast, the agency added.

“Stress testing involves searching out extreme scenarios that have a very remote chance of happening and planning for them,” Romy Bowers, CMHC’s chief risk officer, said in a statement.

“Rigorous stress testing is an essential part of our risk management program and allows CMHC to evaluate its capital levels against these scenarios.

– Alexandra Posadzki, The Canadian Press

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Surrey RCMP are investigating a reported assault at Panorama Ridge Secondary. (Shane MacKichan photos)
UPDATE: Two youths arrested after assault with a weapon at Panorama Ridge Secondary in Surrey

School placed on a ‘hold and secure’ until safety of all students confirmed

Image Surrey.ca
Surrey to pony up one-third of cost to cover Cloverdale lacrosse box in 2022

This will be at the Cloverdale Athletic Park at 64th Avenue and 168th Street

Island Health chief medical officer Dr. Richard Stanwick receives a first dose of Pfizer vaccine, Dec. 22, 2020. (B.C. government)
COVID-19: B.C. seniors aged 90+ can start to sign up for vaccination on March 8

Long-term care residents protected by shots already given

Delta Mayor George Harvie. (Submitted photo)
Mayor asks Fraser Health to reconcider North Delta vaccination site

Harvie wants a North Delta clinic to complement the South Delta location

B.C. Court of Appeal in Vancouver. (File photo: Tom Zytaruk)
Murder conviction upheld in case where Surrey mom was stabbed in front of her kids

Jury in 2017 found Tanpreet Kaur Athwal, aka Sonia Kaur Gill, guilty of first-degree murder in 2007 death of Amanpreet Bahia, 33

Langley resident Carrie MacKay shared a video showing how stairs are a challenge after spending weeks in hospital battling COVID-19 (Special to Langley Advance Times)
VIDEO: Stairs a challenge for B.C. woman who chronicled COVID-19 battle

‘I can now walk for six (to) 10 minutes a day’

Provincial health officer Dr. Bonnie Henry updates B.C.’s coronavirus situation, May 8, 2020. (B.C. government photo)
B.C.’s weekend COVID-19 cases: 532 Saturday, 508 Sunday, 438 Monday

Fraser Health still has most, eight more coronavirus deaths

B.C. Attorney General David Eby speaks in the legislature, Dec. 7, 2020. Eby was given responsibility for housing after the October 2020 provincial election. (Hansard TV)
B.C. extends COVID-19 rent freeze again, to the end of 2021

‘Renoviction’ rules tightened, rent capped to inflation in 2022

Cannabis bought in British Columbia (Ashley Wadhwani/Black Press Media)
Is it time to start thinking about greener ways to package cannabis?

Packaging suppliers are still figuring eco-friendly and affordable packaging options that fit the mandates of Cannabis Regulations

Face mask hangs from a rear-view mirror. (Black Press image)
B.C. CDC unveils guide on how to carpool during the pandemic

Wearing masks, keeping windows open key to slowing the spread of COVID-19

Churches, including Langley’s Riverside Calvary Church, are challenging the regulations barring them from holding in-person worship services during COVID-19. (Langley Advance Times file)
Minister of Families, Children and Social Development Ahmed Hussen takes part in an update on the COVID pandemic during a press conference in Ottawa on October 27, 2020. The City of Vancouver says it has purchased a former hotel at a major thoroughfare that can house about 65 units to accommodate homeless people. A joint news release by the Minister of Families, Children and Social Development, the Canada Mortgage and Housing Corporation and city says 2075 Kingsway, Days Inn by Wyndham Vancouver, will be ready for accommodation this November. The Minister of Families, Children and Social Development Ahmed Hussen also announced a $51.5 million Rapid Housing Initiative for Vancouver that is expected to create 135 new affordable homes. THE CANADIAN PRESS/Sean Kilpatrick
Former Vancouver hotel to be converted to 65 units for homeless people by the fall

The former Days Inn on Kingsway will be ready to house people in November

Det. Sgt. Jim Callender. (Hamilton Police Service screenshot)
B.C. man dead, woman seriously injured after shooting in Hamilton, Ont.

The man was in the process of moving to the greater Toronto area, police say

Most Read