October 18, 2017 / 3:05 PM / a month ago

Canadian housing agency says it can withstand severe downturn

TORONTO (Reuters) - Canada’s federal housing agency said on Wednesday it is well capitalized and able to weather severe but unlikely scenarios including a steep oil price fall and a housing correction like the one experienced in the United States about a decade ago.

The Canada Mortgage and Housing Corporation, responsible for insuring the bulk of Canadian mortgages issued by banks and other big lenders, uses annual stress tests to gauge its resilience to extreme scenarios. It began publishing the results in 2015.

The 2017 stress test confirmed CMHC’s mortgage loan insurance and securitization business had enough capital to withstand the impact of scenarios including an anti-globalization wave, earthquake, steep oil price fall and a sharp housing correction over a five-year period, it said.

CMHC said a housing correction resulting from a 5 percentage point increase in Canada’s unemployment rate and a 30 percent decline in house prices would produce a cumulative net loss of C$217 million ($174 million) over the five-year period, though the minimum capital test ratio would stand at 182 percent. A level below zero indicates insolvency.

“We seek out extreme, almost unimaginable situations and ask ourselves ‘what if?',” CMHC Chief Risk Officer Romy Bowers said. “In all cases, this year’s stress testing shows we are well capitalized to handle these very severe situations.”

Canadian authorities have taken a number of steps over the past 18 months to cool overheating housing markets in Vancouver and Toronto, including implementing taxes on foreign buyers.

Canada’s banking regulator on Tuesday finalized tougher new rules on mortgage lending aimed at safeguarding lenders and borrowers, but warned the measures could push some borrowers into the arms of unregulated private lenders.

Reporting by Matt Scuffham; Editing by Paul Simao

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