REPEAT:CMHC:Test Suggest Can Withstand 30% Home Price Drop

Repeats Story Initially Transmitted at 17:17 GMT Oct 18/13:17 EST Oct 18

By Yali N'Diaye

     OTTAWA (MNI) - Canada Mortgage and Housing Corporation stress tested its

mortgage loan insurance and securitization businesses, concluding Tuesday its

capital could withstand a U.S.-style housing correction with a 30% price plunge

and an unemployment rate soaring to 12.0%.

     The results of the annual stress tests also showed that extreme

protectionism globally would lead to the worst outcome for Canada's economy and

housing market, as well as its financial system stability given that it would

lead to the highest claim losses.

     Yet, CMHC deems its capital position would allow it to withstand even the

most extreme of the four scenarios it stress tested over the 2017-2022 period:

anti-globalization, sharp oil price drops, high-magnitude earthquakes disrupting

critical infrastructure and services, and a U.S.-style housing correction.

     All scenario are considered "extremely unlikely" by CMHC.

     Over the 2017-2022 period, the base case scenario assumes that housing

prices would actually go up 17.6%, with a peak unemployment rate of 6.9%,

compared to 6.2% currently.

     The anti globalization scenario would have the most dire consequences on

real GDP, the unemployment rate, housing prices, as well as claim losses.

     Under this scenario, protectionism would arise from downturns in the U.S.

and China after a rapid U.S. interest rate increase combined with unsustainable

Chinese debt levels create a global demand shock.

     Home prices would plunge 31.5% over the period, and the unemployment rate

would peak at 15.3%. 

     The second most damaging scenario for Canada's economy would be a

U.S.-style housing correction where the unemployment rate would soar by 5

percentage points to 12.0%, leading to a 30.0% housing price drop.

     Another oil price shock would only come third in terms of damage to the

economy: excess supply would send oil prices below $20. Prices would then stay

within the $20-$30 dollar range for two years before recovering.

     The unemployment rate under this scenario would rise to 9.1% and housing

prices fall 9.1%.

     In mid-2014, when oil prices started to drop, the unemployment rate was at

7.0%, and decreased to 6.6% in January 2015 before rising again to peak at 7.2%

in February 2016.

     Scenarios of high magnitude earthquake, on the other hand, pause the least

threat to the housing market, with housing prices edging down just 0.2% over the

period, and the unemployment rate peaking at 8.2%.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com