Sudden rise in interest rates could cause home prices to drop 30 per cent: CMHC

Federal housing agency sounds warning as it releases stress test findings on Canadian mortgages

Worries are growing that a sharp interest rate rise could deflate home prices.

Worries are growing that a sharp interest rate rise could deflate home prices.

TORONTO – A sudden rise in interest rates could cause house prices to plummet on average 30 per cent nationally, according to stress tests performed by Canada’s federal housing agency released Thursday.

Canada Mortgage and Housing Corp. said it studied the impact of two interest rate hikes – a one percentage point increase over one quarter this year, followed by a 1.4 percentage point rise during one quarter next year.

CMHC said its mortgage insurance business would incur $1.13 billion in losses in such an event but that it could withstand the hit. A spokesman for the agency stressed that the scenario is an “extreme case” and would be unprecedented.

Interest rates have started to go up this week as a sell-off in the U.S. bond market has driven bond yields higher, making it more expensive for banks to access capital.

Two of Canada’s biggest banks – TD Bank (TSX:TD) and Royal Bank (TSX:RY) – have hiked their fixed mortgage rates, anywhere from 0.05 percentage points to 0.4 percentage points.

There are concerns that as interest rates rise, some Canadian homeowners could encounter difficulty making their mortgage payments and face the risk of default.

“Households are so leveraged right now and house prices are at such incredibly high levels relative to household incomes,” said David Madani, senior Canada economist at Capital Economics.

“Even a moderate doubling in interest rates – which sounds like a lot but we’re talking about maybe 200 basis points (two percentage points) – could potentially pop the housing bubble.”

Interest rates have been trending lower for more than a decade, but that has not always been the case.

Fuelled by inflation, mortgage rates soared in the 1980s and posted five-year fixed rates topping more than 20 per cent in 1981.

According to data kept by the Bank of Canada, the posted five-year rate for a conventional mortgage at the big Canadian banks climbed from 13.25 per cent in January 1980 to 16.75 per cent in April 1980, an increase of 3.5 percentage points.

However, Canada started using an inflation target to guide monetary policy in 1991 and since then inflation has been mostly tamed and interest rates have fallen.

The stress test conducted by CMHC was one of several extreme scenarios it examined over a time period from 2017-2021. They included a U.S.-style housing correction, a high-magnitude earthquake that destroys critical infrastructure in a major Canadian city and a drop in oil prices where they fall to US$20 per barrel next year and remain between US$20-30 for another four years.

Another scenario that the agency tested involved a “severe and prolonged” economic depression, which CMHC said would see house prices drop 25 per cent and unemployment rise to 13.5 per cent. The insurer said it would incur $3.12 billion in losses in that case.

CMHC said its capital holdings were sufficient to withstand all scenarios it tested. None of the scenarios should be considered a prediction or forecast, the agency added.

“Stress testing involves searching out extreme scenarios that have a very remote chance of happening and planning for them,” Romy Bowers, CMHC’s chief risk officer, said in a statement.

“Rigorous stress testing is an essential part of our risk management program and allows CMHC to evaluate its capital levels against these scenarios.

– Alexandra Posadzki, The Canadian Press

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Vedder Park area where alcohol consumption was part of a pilot project in 2020. (City of Chilliwack)
Hundreds weighed in with opinions on alcohol consumption in Chilliwack parks

Pilot project in two Chilliwack parks last summer saw responsible drinking in designated areas

Russell Jonathon George Gurney was last seen in Chilliwack in mid-December. (RCMP photo)
RCMP ask for help to find missing Abbotsford man last seen in Chilliwack

Police and family are concerned for the well-being of Russell Jonathon George Gurney

In this photo illustration, a provincial election mail-in ballot sealed in an Elections B.C. return envelope is seen before being deposited in a Canada Post mailbox, in Richmond, B.C., Saturday, Oct. 17, 2020. For the Chilliwack school board byelection being held Feb. 13, 2020, mail ballots will now be a part of the process. (The Canadian Press/ Darryl Dyck)
Mail ballots approved for Chilliwack school board byelection

Applications to vote by mail need to be submitted to city by Jan. 28

Leonard Hodgins released his seven-song EP, A Date, with Disaster, on Jan. 4, 2021. (Submitted)
‘Silver lining’ to pandemic as Chilliwack musician finds inspiration, releases new album

Leonard Hodgins released his EP ‘A Date, with Disaster’ at the beginning of 2021

Preliminary artist rendering by Karvin Developments for three-lot subdivision on Berkeley Avenue. (City of Chilliwack/Karvin)
Subdivision proposal for three new homes on Berkeley Avenue goes through

Developer agrees to two-storey height limit on homes proposed for large lot over slough

Maj.-Gen. Dany Fortin, vice-president of logistics and operations at the Public Health Agency of Canada, speaks at a news conference on the COVID-19 pandemic in Ottawa, on Friday, Jan. 15, 2021. THE CANADIAN PRESS/Justin Tang
B.C. records 500 new COVID-19 cases Wednesday, 14 deaths

Outbreak at Surrey Pretrial jail, two more in health care

Vancouver Canucks’ Travis Hamonic grabs Montreal Canadiens’ Josh Anderson by the face during first period NHL action in Vancouver, Wednesday, Jan. 20, 2021. THE CANADIAN PRESS/Jonathan Hayward
Horvat scores winner as Canucks dump Habs 6-5 in shootout thriller

Vancouver and Montreal clash again Thursday night

A woman writes a message on a memorial mural wall by street artist James “Smokey Devil” Hardy during a memorial to remember victims of illicit drug overdose deaths on International Overdose Awareness Day, in the Downtown Eastside of Vancouver, on Monday, August 31, 2020. THE CANADIAN PRESS/Darryl Dyck
B.C. paramedics respond to record-breaking number of overdose calls in 2020

On the front lines, COVID-19 has not only led to more calls, but increased the complexity

Eighteen-year-old Aidan Webber died in a marine accident in 2019. He was a Canadian Junior BMX champion from Nanaimo. (Submitted)
Inadequate safety training a factor in teen BMX star’s workplace death in 2019

Aidan Webber was crushed by a barge at a fish farm near Port Hardy

Southern resident killer whales in B.C. waters. Research shows the population’s females are more negatively influenced by vessel traffic than males. (Photo supplied by Ocean Wise Conservation Association)
Female orcas less likely to feed in presence of vessel traffic: study

Research the southern resident population raises concerns over reproduction capacity

(Black Press Media files)
Transport Canada not budging on enclosed deck rules, despite calls from BC Ferries union

There have been at least 23 cases of the U.K. variant detected in Canada, four of which are in B.C.

Cannabis bought in British Columbia (Ashley Wadhwani/Black Press Media)
Is it time to start thinking about greener ways to package cannabis?

Packaging suppliers are still figuring eco-friendly and affordable packaging options that fit the mandates of Cannabis Regulations

The Elk Valley Hospital is adapting to meet the needs of patients in the Elk Valley.
1-in-5 COVID tests coming back positive in and around Fernie, sparking concern

Dr Ron Clark of Elk Valley Hospital said one in five tests was returning positive for COVID-19

Ralliers gather in front of the Cityviews Village apartment building in Maple Ridge to protest attempts to evict low-income tenants by the building owner. (Ronan O’Doherty - The News)
Tenants protest pressure tactics by new landlord at Maple Ridge apartment building

Protest held in front of Cityviews Village on 223 St. Tuesday to rally against low-income evictions

Most Read