Canadian banks could weather a 25% home price crash – Moody’s

by Ephraim Vecina15 Aug 2016
Canada’s banks are sufficiently robust to survive as much as a 25 per cent crash in home prices in the red-hot housing markets of Vancouver and Toronto, according to ratings agency Moody’s.
However, such a meltdown won’t leave the banks unscathed, as the country’s banking system could collectively lose more than $12 billion in the process, reported
Moody’s noted that the hypothetical 25 per cent collapse in Canadian housing is the worst-case scenario, taking into account current trends and prices (which have exceeded over $1.5 million for detached properties in the hottest cities).
“[The] majority of banks would be able to absorb losses within one-quarter of earnings,” Moody’s stated.
Seemingly non-stop price increases coupled with cheap credit has led to an unprecedented $200-billion transaction revenue in Canada’s housing markets over the past 12 months alone. However, this growth has fuelled fears of a potential bubble.
“Rising household debt … has gone hand-in-hand with large increases in the cost of housing,” Capital Economics global economist Michael Pearce recently said.
“The risk is that, if house prices begin to fall, households will be forced to cut back spending to repay debt and that defaults will rise as households fall into negative equity.”

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