The Office of the Superintendent of Financial Institutions has told Canada’s banks that they should stress test for a 50 per cent decline in home prices in Vancouver and a 40 per cent drop in Toronto.
While many analysts have suggested a slide in prices in Canada’s hottest markets, the high figures OSFI is talking about are extremes, designed to ensure that banks are able to withstand a correction and then some.
For the markets to face a plummet in prices to those degrees would mean some significant economic issues in play which are unlikely, as BMO Capital Markets’ senior economist Benjamin Reitzes told BNN:
“Getting prices to fall to that extent would either take a massive jump in interest rates, which I don’t think anybody sees, or a very significant recession – which, again is not in our forecast or anybody else’s.”
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It’s unlikely to happen, but some of Canada’s largest mortgage lenders have been told to prepare for some seriously scary drops in home prices.