The Canada Mortgage and Housing Corporation has crunched numbers on the assumption that the economy could get rocked by any number of different calamities and come to the same conclusion: the corporation itself would be all right.
CMHC, which holds the vast majority of Canadian mortgages on its books via underwritten insurance policies, has published the results of its latest stress test. It's has been running such a test every year since 2015, when the country's top bank regulator asked it to start testing whether its business could withstand even the most extreme scenarios.
This year, the agency decided to test how it would do under four extreme scenarios, were they to happen in the next five years:
- A rise in anti-globalization sentiment leading to tariffs and trade barriers.
- A major earthquake in Canada.
- A steep decline in the price of oil.
- A housing market correction similar to the one in the U.S. in 2007.
In each case, the CMHC passed its own stress test — which means its finances would be able to withstand the damage.
"As a responsible risk manager, we seek out extreme, almost unimaginable situations and ask ourselves 'what if?" said Romy Bowers, the CMHC's chief risk officer.
"That's the goal of our stress testing — to measure how we would stand up to these unlikely shocks. In all cases, this year's stress testing shows we are well capitalized to handle these very severe situations."
In all scenarios, the CMHC would emerge with an operating capital ratio well above its own target of 165 per cent.
"We set aside capital to withstand losses that would arise from these events," Bowers said, "and we concluded our balance sheet is strong and we'd be able to fund these losses."
The agency is quick to note that while it is testing its own resilience against extreme shocks, that doesn't mean it expects them to happen. "We don't expect these situations to arise, but it's important for us to understand what could happen," Bowers said.
Shifting trade winds
The results were eye-opening. Among the most damaging scenarios would be a rise in anti-globalization sentiment, something the housing agency reckons would lead to an as much as 31 per cent decline in house prices, and cause the jobless rate to more than double, to above 15 per cent.
"There's a lot of protectionist sentiment in the world, so we thought that would be a good topic this year," Bowers said in an interview. But even under that dire scenario, the agency calculates it would still eke out a cumulative profit of about $118 million over the five years during which such an unlikely shock would unfold.
The earthquake test, meanwhile, determined that a major tremor could take a huge toll on people and property, but very little on other parts of the broader economy. House prices would decline by about 0.2 per cent, and the jobless rate would tick higher to 8.2 per cent. CMHC's profits would remain at a healthy $6.5 billion.
A steep decline in the price of oil, however, would hit a little harder, pushing national average house prices down 9.1 per cent, which, coincidentally, is what the agency calculates the jobless rate would rise to.
Only the last scenario, a U.S.-style housing market crash of 30 per cent, would be enough to tip CMHC's insurance business into the red, and a loss of $217 million over five years. That dire scenario would also see the jobless rate rise to 12 per cent.
"We've had regional housing crises in the past," Bowers said, "and the impact is not as great as a national crash. But we are trying to look more broadly, and we're trying to look at the worst-case scenario."
On the whole, Bowers says the tests show the CMHC is well equipped to weather any storms that may be on the horizon, but she urgers individuals to make sure they can say the same.
"They need to think about how extreme events in their personal lives could impact their personal balance sheets."