There is a risk of a collapse in housing prices if oil falls to $35 US a barrel and remains there for five years, triggering unemployment of 12.5 per cent in Canada, according to Canada Mortgage and Housing Corporation.
CMHC chief executive Evan Siddall presented that scenario to a Canadian Association of New York luncheon on Monday, saying house prices could decline by 26 per cent if that happened.
Siddall said he doesn't expect that scenario to play out, but it's one of several that the federal housing agency considered in trying to assess what kinds of risks might be faced by the Canadian housing market.
West Texas Intermediate oil, the benchmark North American contract, is currently just below $45 US a barrel and unemployment is at seven per cent in Canada.
A more extreme scenario CMHC considered was widespread global deflation which could drive down housing prices by 44 per cent. Deflation, or falling prices, could stall business investment and push unemployment to 16 per cent.
Joblessness could hurt house prices
High unemployment tends to be a greater risk to housing markets than rising interest rates, as joblessness can lead people to try to sell quickly or to default on payments. Canadian households' current high level of indebtedness make them more vulnerable, Siddall said.
Currently CMHC experiences a low level of arrears on its insured mortgages – 0.35 per cent as of September.
The agency has a mandate to contribute to the stability of the housing market and financial system.
As part of that process, it tries to predict the impact on Canadian housing of various economic scenarios, some of which Siddall described as "wild." Among them are a magnitude 9.0 earthquake in Vancouver that also resulted in the failure of a major lender and a U.S.-style housing price collapse of 30 per cent.
Siddall said in a speech earlier this month that the scenario of five years of $35 oil is CMHC's "bedrock scenario...used to set the capital levels for our mortgage loan insurance business."
CMHC concludes it has sufficient capital to weather such a shock without turning to taxpayers for money, though the amount of funding it contributes to the federal government would be reduced.
Current outlook points to oil risk
In its current housing market outlook, it says the "future path of oil prices remains the most significant domestic risk" in the Canadian economy.
Oil prices are down 50 per cent from a year ago, forcing Canadian oil firms to trim investment and jobs and hurt the economies of oil-producing regions. Most analysts forecast oil will rise in 2016, but some say it could fall further.
But in its current outlook, CMHC points out that the downturn in Alberta has been offset by growth in exports from B.C. and Ontario.
"While the prolonged decline in oil prices triggered two consecutive quarters of real GDP contraction in 2015, employment gains and low interest rates have supported housing activity," it says.
Housing prices rose six per cent in the year to October in Canada, according to the Canadian Real Estate Association.
For next year, CMHC presents a range of outlooks – from a four per cent drop to 6.5 per cent rise in housing prices, pointing out that housing markets across Canada are very uneven.
House price inflation is expected to moderate in hot markets such as Toronto and Vancouver because of higher mortgage rates, but there also could be a decline in housing starts, it says.
It points to considerable uncertainty over the negative impact of low oil prices and the downturn in China, but said there is also potential for a stronger-than-expected growth in the U.S.
Its base case scenario over five years for Canada's housing market is price increases of 9.1 per cent and joblessness at about 6.6 per cent.