Economic slide to earthquake: CMHC ‘stress tests’ worst-case scenarios for housing market

The Canadian Mortgage and Housing Corp. revealed last week that it had run “stress tests” of at least four scenarios that could cause the Canadian housing market to slide.

CMHC head Evan Siddall revealed the scenarios – which ranged from economic woes to natural disasters – during an address last week, according to Glbalnews.ca. Here are the scenarios:

• A 5-year-long global economic slide: If the world economy were to experience widespread deflation over the course of five years, it would significantly impact the Canadian housing market, as well as – obviously – the broader national economy.
• Oil remains low for an extended period: In this scenario, oil prices don’t rise above $35 for at least the next half-decade. The oil slump has already hit the Calgary real estate market hard, with office vacancies approaching 15%.
• A U.S.-style crash: In this scenario home prices take a 30% tumble nationally and the jobless rate jumps by five percentage points. A collapse like that would trigger $13.2 billion in losses for the CMHC, according to Globalnews.ca.
• A Vancouver earthquake: This isn’t something that can really be avoided by careful monetary policy. A 9.0 earthquake in booming Vancouver would be disastrous in human terms, of course, but the destruction of valuable real estate could also trigger the failure of a major lender, according to the CMHC.

Siddall also pointed out that “key data gaps” remain in the agency’s ability to monitor the housing market. The biggest gap, he said, is the extent to which foreign investment is driving up Toronto and Vancouver real estate prices.

Real estate experts say this may be the first time the CMHC has openly discussed its evaluation of crisis scenarios, according to Globalnews.ca.

“(It was) a helpful perspective, RMC Capital Markets analysts wrote in a research note. “Particularly since we think this is the first time CMHC has disclosed this publicly.”