An expected October interest rate hike could send average home prices down as much as a fifth this year, the Parliamentary Budget Office said yesterday. “Average income households across the country are stretching their finances,” wrote analysts..“Households that recently purchased a home have become more financially vulnerable,” said a Budget Office report House Price Assessment Update. Findings were based on data in Victoria, Vancouver, Calgary, Edmonton, Winnipeg, Hamilton, Toronto, Ottawa, Montréal, Québec City and Halifax..According to Blacklock's Reporter, analysts noted the national average home price has fallen 7% since peaking last February prior to a string of five increases in the Bank of Canada prime rate. From a high of $839,600 average prices are now $777,200. Additional price declines are expected, said the report..“To gauge the potential downward adjustment in house prices in 2022 we construct scenarios based on assumed increases in mortgage rates to 6.25 % for the five-year fixed rate over the remainder of 2022,” wrote analysts. Five-year fixed mortgage rates are currently in the 5.5% range. The Bank of Canada will introduce a sixth rate increase on October 26..“Our house price adjustment scenarios imply price declines at the national level relative to peak prices in 2022 ranging from 12% to 23% by the end of this year,” said the Budget Office..The Bank of Canada has estimated 10% of mortgage holders borrowed money at variable rates. “There is no doubt they are being squeezed,” Deputy Governor Carolyn Rogers told reporters July 13..“Aren’t you worried about turning a housing slowdown into a rout?” asked a reporter. “We know housing has an effect on Canadians’ confidence,” replied Rogers..Canada’s bank superintendent in an April 21 Annual Risk Outlook said the chance of a disastrous downturn in the housing market was plausible. “As mortgage rates edge upward on expectations of tightening monetary policy and as the severe but plausible risk of a housing market downturn remains, homebuyers and lenders alike will have greater confidence to weather negative shocks with the minimum qualifying rate ‘stress test,’” wrote the Office of the Superintendent of Financial Institutions..“While we have committed to reviewing the minimum qualifying rate at least annually we are prepared to make changes at any time if conditions warrant,” wrote staff. “The next planned minimum qualifying rate announcement date is December 15.”.Canada Mortgage and Housing Corporation (CMHC) had predicted only a 1983-style recession with high unemployment could result in serious losses. “The key drivers of loss for us are high unemployment coupled with a dramatic decrease in housing prices,” CEO Romy Bowers testified at a 2017 hearing of the Senate national finance committee..Bowers said CMHC stress tested its insurance portfolio to withstand a 30% decline in average home prices and 11.5% national unemployment, a rate last seen in 1983. “I talk about a 30% national house price decline,” said Bowers. “In Canada we have never had that luckily, knock on wood. We don’t have a historical precedent in Canada.”’.A 1982 real estate crash led to the closure of 36 federally-insured loan and trust companies by 1996. Two Alberta banks folded in 1985, the Canadian Commercial and Northland banks, at a cost of $1.3 billion in federal deposit insurance payouts. Two other teetering institutions, the Bank of British Columbia and Continental Bank, merged with larger rivals.
