The ratings agency’s assessment of the risk to the big banks if there was a sharp drop in house prices highlights that rising household debt and rapidly increasing home prices “demonstrate conditions similar to the US leading up to the financial crisis” but that Canada’s structural differences between the two mortgage markets makes a catastrophic loss to Canadian lenders unlikely.
The hypothetical scenario that Moody’s has considered is a 25 per cent drop in property values nationwide (the same as the drop in US prices at the start of the crash in 2007) and an additional 10 per cent in Vancouver and Toronto.
The report acknowledges that the banks’ mortgage portfolios are of higher quality than those that crippled lenders in the US and that the big banks are well-placed to withstand the impact.
"Canadian policymakers have made significant structural changes to the market - some informed by the US example - that would help contain the effects that a severe housing shock could have on the country's banks," said Moody's Assistant Vice President Jason Mercer.
The higher quality of mortgages in Canada compared to those that turned bad in the US housing crash, should also protect the Canadian government (and taxpayers’) exposure to a crash.
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If Canada’s housing market was to crash, the big banks would lose out by $12 billion according to Moody’s.