Canadian banks to undergo mortgage stress tests

The Canadian real estate market has seen massive growth this past year, particularly in the Toronto and Vancouver regions. As a result of this staggering growth, some banks in the country have been ordered by the Office of the Superintendent of Financial Institutions (OSFI) to undergo stress tests to demonstrate their stability in case of a market drop.

The OFSI has called for more rigorous criteria to be tested as well to measure the effects of a potential decline in the market. The banks will now be required to evaluate how a decline of at least 50 percent in housing prices in the Greater Vancouver area and of at least 40 percent in the Greater Toronto area. Testing in all other regions of the country will use a declination value of at least 30 percent, consistent with the OFSI’s previous requirements.

The new stress tests are currently only required for smaller federally regulated banks, such as Canadian Western Bank or Equitable Bank. The larger Canadian banks and HSBC have not been ordered to change the criteria of their stress tests, as the Bank of Canada and the OFSI regulator regularly collaborate to conduct macro stress tests on the Big Six.

This is the first time the OFSI has changed real estate testing requirements since the economic crash of 2008.

While the ordered stress tests are not necessarily forecasting an upcoming market crash, the new regulations have added to growing concerns over Canada’s surging national housing prices.

As of June, national housing prices increase by 10 percent year-over-year, and Vancouver and Toronto saw even greater pricing increases. Despite the staggering growth of the real estate market, incomes around the country have remained stagnant and the economy is still weak.

As a function of this, the OFSI regulator has warned banks to watch their mortgage borrowers carefully and increase the scrutiny of borrowers’ incomes, credit scores, and debt levels. Further, the Bank of Canada has expressed concern over the “increased riskiness” in the mortgage industry as greater household debt poses greater danger for lenders.

In response, the B.C. government has granted the city of Vancouver the power to implement an “empty home tax.” They have also introduced a 15 percent property transfer tax on non-resident foreigners buying real estate in Metro Vancouver. Ontario’s Minister of Finance has applauded the move and will be watching closely.