A new report from rating agency Moody's says Canada's big banks would survive even a serious downturn in the housing market, though it could still cost them almost $12 billion.
In a report Monday, Moody's made some pessimistic assumptions about the health of the housing market and came to the conclusion that the country's biggest lenders would be more than able to withstand a decline of more than 25% "without catastrophic losses" to their businesses.
The worst-case scenario for Canadian housing, Moody's says, is about a 25% decline in the average house price, which was at more than $500,000 last month according to the Canadian Real Estate Association.
The two hot markets of Toronto and Vancouver, meanwhile, were assumed to have declined even more, by 35%, in Moody's view.
In that case, Canada's biggest banks would see losses of roughly $11.7 billion. At that level, "the majority of banks would be able to absorb losses within one quarter of earnings," Moody's wrote.
While a loss of more than $10 billion for the six biggest banks alone is significant, Canada's banks would be better equipped to limit the damage of a housing slowdown of that size due in part to how the market is regulated in Canada.
The vast majority of mortgages in Canada are insured by the government-backstopped Canada Mortgage and Housing Corporation, which means the banks are insured if any loans they make with CMHC-insurance go sour. That wasn't the case in the U.S. at the time.
For its part, the CMHC could expect losses of almost $6 billion in the Moody's analysis, a large figure but one it would be able to financially handle.
