Rate rise could cut home prices 30 per cent: CMHC

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.

The housing corporation said its mortgage insurance business would incur $1.13 billion in losses in such an event but that it could withstand the hit. A spokesperson 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 and Royal Bank — 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.”

The stress test conducted by the housing corporation was one of several extreme scenarios it examined over a 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.

The housing corporation said its capital holdings were sufficient to withstand all scenarios it tested. None of the scenarios should be considered a prediction.