Housing market downturn poses challenges for Canadian banks

While DBRS Morningstar expects a structural supply-demand imbalance to create a floor for Canadian housing prices over the long term, the country’s housing market is entering a rough patch. The 1.9% monthly decline in national home prices in June contributed to a 3.3% cumulative decrease in prices since March.

Aside from interest rates, borrowers have been challenged by an increase in the minimum qualifying rate (MQR) for mortgages introduced under Guideline B-20 by the Office of the Superintendent of Financial Institutions (OSFI).

Higher interest rates and the tighter underwriting standards in the prime mortgage market, dominated by traditional lenders including the Big Six banks, could drive more borrowers to the alternative mortgage lending market. Affordability could become a challenge in the alternative lending segment, the report said.

Asset quality metrics in Canadian banks’ residential mortgage portfolios are strong, as credit quality improved during the pandemic to historically low levels. A downward trend in mortgage delinquencies could be attributed to high savings rates, a tight labour market, and the buoyancy in the housing market over the past two years.

But the report “expects deterioration from these unsustainably low levels that could be magnified if borrowers struggle with higher mortgage carrying costs.”