Canadian housing market not that bad for banks

Canadian housing market not that bad for banks - Micah verceles
Canadian housing market not that bad for banks

The impact Canada’s cooling housing market is having on loan growth will undoubtedly be an area of focus when the country’s big banks start reporting second-quarter earnings next week.

However, while housing resale activity continues to struggle (3% lower than levels this time last year), the numbers for April demonstrate Canada’s real estate market remains stable.

“A slow down in the Canadian housing activity is a negative from the perspective of the Canadian banks’ earnings, however, we do not believe that it will result in any material credit issues,” Barclays analyst John Aiken said in a report.

“That said, lower loan growth will likely have a significant impact on the earnings growth outlook for the banks that rely to a greater degree from domestic consumer lending.”

Data from the Canadian Real Estate Association (CREA) showed national home sales activity rose 60 basis points on a monthly basis in April, compared to a 2.4% increase in March.

Mr. Aiken noted the pace of re-sale activity declines on an annual basis also slowed – down 3% – as home sales improved in more than half of local markets.

He also pointed out resale prices remain resilient, up 50 bps month-over-month and 1.3% on an annual basis.

The national sales-to-new listings ratio rose 70 bps to 50.4%, “remaining firmly in balanced territory,” Mr. Aiken said.

Meanwhile, another indicator of housing supply and demand – the number of months of inventory – remained unchanged at 6.6 months.

The analyst noted CIBC continues to have the greatest sensitivity to domestic retail loan growth pressure, followed by Toronto-Dominion Bank and National Bank.

Meanwhile, Bank of Nova Scotia, Bank of Montreal and Royal Bank of Canada have the lowest lending volume sensitivities.

“This coincides with the relative contributions of domestic mortgages to the banks’ overall loan portfolio as well as the contribution of earnings from their domestic retail bank segments,” Mr. Aiken said.

Canaccord Genuity analyst Mario Mendonca also highlighted signs of stabilization in Canadian housing prices.

While he thinks the seasonally strong summer months could provide some strength for the market, Mr. Mendonca expects housing prices will moderate from current levels and even modestly soften in the near term. He attributes this to the more overheated areas such as Vancouver and the Toronto condo market.

“Importantly, we believe the Canadian banks would be able to weather a more than modest decline in housing prices due to the relatively high level of insured mortgages (approximately 60% of all mortgages), the relatively low loan-to-value ratios (55-60%) and the relatively low debt-service ratio of around 30-40%,” Mr. Mendonca told clients.

“That said, there is some tail risk with lower-income homeowners with a higher debt service ratio, particularly if we see a rise in unemployment.”

The analyst noted the substantial decline in housing starts should produce more stable prices and support the notion that more stringent underwriting standards introduced by Ottawa last year are starting to reduce demand.

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Jonathan Ratner, Financial post

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