The risks of a housing correction that may impact Canada's banks remain despite policymakers' efforts to cool prices, says Fitch Ratings in a new report.
High home prices "could cause challenges for Canadian banks if there is a severe economic shock", the rating agency warns in a report published on Wednesday.
In particular, the report warns that banks with significant mortgage exposure to the Toronto and Vancouver markets may be more sensitive to a rapid correction in these markets.
"Home price growth in Toronto and Vancouver is outpacing fundamentals however most Canadian banks should be able to withstand a market correction, but in the event of an adverse unemployment shock or rapid rise in interest rates, banks could be more heavily impacted," says Doriana Gamboa, senior director, Fitch, in a statement.
Fitch expects that the Canadian Mortgage and Housing Corp. (CMHC) would act as a shock absorber if a severe economic shock hits, the report notes. While the banks' ratings could be affected in such a scenario, Fitch believes the banks have adequate capital cushions to absorb this risk, the report says.
"Recent attempts by federal, provincial and local governments to cool the housing market through various measures, so far have not dampened prices and risks may escalate for banks, though given healthy capital levels a modest correction would be manageable," adds Gamboa.
Additionally, liquidity issues at alternative mortgage lender Home Capital Group are specific to its business model, the report says, and current credit measures do not suggest problems with asset quality generally.
Currently, non-bank lenders represent about 13% of the $1.4 trillion mortgage market, and Fitch does not see this sector posing a challenge to the dominance of the big six Canadian banks in the housing sector.
"It's unlikely that nonbank mortgage companies will dominate the housing sector anytime soon as the tightening of CMHC mortgage insurance rules implemented in October 2016 impacted a significant funding source for mortgage companies," concludes Gamboa.
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