Canada housing agency says stress test shows capital sufficient

OTTAWA (Reuters) - The capital holdings of Canada’s federal housing agency would remain sufficient in a number of extreme scenarios, including a sudden increase in interest rates and a U.S.-style housing correction, the agency said on Thursday.

A construction worker works on a new house being built in a suburb located north of Toronto in Vaughan, Ontario Canada, June 29, 2015. REUTERS/Mark Blinch/File Photo

In the results of its 2016 stress tests, the Canada Mortgage and Housing Corp (CMHC) said it looked at five hypothetical scenarios and what effect they would have over the next five years.

In none of the cases did CMHC’s ratio of available capital to required capital fall below the level where an insurance company would no longer be allowed to write new business, or to a level that would indicate insolvency.

The same was true when the scenarios were analyzed under new minimum capital test rules which will be implemented at the start of next year and incorporate factors such as credit score and outstanding loan balance.

CMHC, which is responsible for insuring the bulk of Canadian mortgages issued by banks and other big lenders, follows stress test guidance set by the financial institutions regulator.

The scenarios were similar to stress tests conducted last year, with the addition of a “reverse stress test” scenario where a sudden increase in interest rates leads to higher borrowing costs, causing Canadian home prices to fall 30 percent and the failure of a financial institution.

In that case, CMHC would see a cumulative net loss of C$1.1 billion ($820.16 million) in its insurance business over the five years, though its minimum capital test ratio would stand at 262 percent under current standards. A level below zero indicates insolvency.

In the case of a U.S.-style housing correction where unemployment rises to 12 percent and home prices drop 30 percent, CMHC would see a loss of C$2.1 billion with a capital ratio at 286 percent.

The scenarios should not be considered a prediction or forecast, CMHC said.

Years of low interest rates since the global financial crisis have boosted Canada’s housing market, which some fear is overheating, particularly in the major cities of Vancouver and Toronto.

CMHC said last month there was strong evidence that many of the country’s housing markets are overvalued, though it expects activity to cool over the next two years.

Reporting by Leah Schnurr; Editing by Bernadette Baum