TORONTO -- Ratings agency Moody's says that despite soaring home prices and household debt levels, Canadian banks could weather the effects of a severe housing downturn.
In its latest report, published Monday, Moody's says it conducted stress tests to determine the impact on major Canadian banks in the event of a 25 per cent drop in home prices countrywide.
The analysis also included an additional 10 per cent decline in Ontario and British Columbia, where prices have skyrocketed in recent years.
The ratings agency says that under such a scenario total direct losses to the banking system would reach almost $18 billion. However, Moody's says the banks would be able to generate internal capital to cover those losses within several quarters.
A number of organizations, including the Organization for Economic Co-operation and Development, have raised concerns recently about red-hot real estate markets in the Toronto and Vancouver areas.
In a report issued earlier this month, the OECD urged Ottawa to introduce legislation to cool those two markets, warning that a correction could threaten the country's financial stability.
The Bank of Canada has also recently commented on the topic, noting that the rapid price escalation in the Toronto and Vancouver real estate markets is likely unsustainable.
Moody's says rising household debt levels and surging house prices in Canada paint a similar picture to the one seen in the United States prior to the financial crisis.
However, the ratings agency says there are a number of structural differences between the Canadian and U.S. mortgage markets that would mitigate the negative impacts of a housing downturn if one were to occur north of the border.
For example, the federal government guarantees nearly $750 billion of residential mortgage loans, according to Moody's.
There are also much lower rates of subprime lending and a lower prevalence of certain kinds of securitization practices in Canada relative to the U.S.
