Vancouver housing prices risk mortgage default: report
B.C. financial regulator warns credit unions about possibility of default on residential mortgages
People on the west coast are used to getting warnings about the Big One.
But the earthquake imagined in a new report prepared for B.C.'s Financial Institutions Commission is economic - not seismic: a housing market crash leading to mass mortgage default.
The results could be just as devastating.
"Default is costly to everyone involved," reads the report, sent by FICOM to the province's credit unions last week.
"Default risk is of particular concern given the continuously climbing housing price in the Greater Vancouver area. When the US last experienced a housing price run-up, what followed was a disastrous crash, the effects of which still persist today."
Housing market 'overvalued'
The report details models and methods for analyzing the probability of default on residential mortgages. It was authored by Mingxin Li, a PhD candidate in the Beedie School of Business at Simon Fraser University.
In an email, FICOM says the research was "not undertaken because of any specific concerns about credit union lending or issues in the lending market."
But the report comes on the heels of a warning from the International Monetary Fund about the possibility of a "hard landing" for a Canadian housing market described as "overvalued."
The IMF's commentary notes house prices have risen more than 60 per cent nationwide since 2000, with "Vancouver ranking second in terms of the lowest affordability globally after Hong Kong."
Stress tests for balance sheets
According to Li's report, 68 per cent of B.C. credit union loans are personal real estate backed assets. And as of the second quarter of 2014, mortgages accounted for 47 per cent of total consumer debt.
"We do not attempt to make predictions of the housing market in B.C.," the report says.
"Rather, we emphasize the importance of understanding the risk of mortgage default, as real estate backed loans play a key role in our financial system."
FICOM says it hopes the research will help credit unions develop more effective credit risk models.
Li argues financial institutions need to conduct "stress tests to gauge the resilience of their balance sheets to substantial macroeconomic shocks."
Helmut Pastrick, the chief economist for Central 1 Credit Union, the umbrella organization for the credit union system in BC and Ontario. says the earthquake analogy is apt.
"There could be an economic earthquake," Pastrick says.
"No doubt there will be another economic recession. There will be a time when housing prices decline. That's almost certain. This current phase we're in will not last indefinitely."
Economists draw a distinction between Canada's attempts to regulate mortgages and the dubious lending practices which led to the 2008 U.S. economic crisis.
But the IMF noted that household debt levels have increased to historical highs over the past decade, at more than 150 per cent of disposable income.
Li's report says the ability of a borrower to service a loan is a crucial factor in assessing the risk of default, but says lenders may also consider house price volatility and even factors such immigration, labour and housing.