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The Housing Market and Household Debt: Implications for the Canadian Banks

By James Shanahan January 02, 2019


Canadian home prices have continued to grind higher, despite rising mortgage rates and intervention by federal regulators, provincial governments, and the Canadian Mortgage and Housing Corporation (CMHC). Nationwide, Canadian home prices have increased by 70% over the past decade, or 5.5% per year. While impressive, household debt growth has been even more significant. The average Canadian household holds $171,300 of debt for every $100,000 of income (ratio of 171%).

Comparatively, this ratio reached a record of 130% in the United States just prior to the financial crisis. Today, the ratio for U.S. households is near 100%.

The substantial increase in household debt has been positive for bank loan portfolios and revenues. Going forward, however, growth in household borrowing is likely to be below the long-term trend. In a downside scenario, overextended households could drive higher credit costs, particularly if labour markets weaken and/or home prices decline. Of particular concern to us is the growth in uninsured loans backed by Canadian residential real estate.

Since early 2015, loans of this type held by the big six Canadian banks have increased by $197 billion (+19%). However, this includes a $256 billion increase in uninsured loans, partially offset by a $59 billion reduction in insured loans. As a result, the percentage of uninsured loans has risen to 63%, up from 50% in early 2015. This growth can be attributed, in part, to efforts by the CMHC to reduce risk. Over the past few years, the CMHC has effectively transferred significant housing market risk to investors in the six largest Canadian banks and away from taxpayers.

Loans Backed By Canadian Residential Real Estate Held by the Six Largest Canadian Banks


See the full report (pdf)

Summary. We remain somewhat cautious on the Canadian banks. We suggest allocating about 20% of your portfolio to financial services stocks, including nonbank financial stocks. We suggest working with your Edward Jones financial advisor to reduce your portfolio's equity exposure to bank stocks if your portfolio is overweight financial services stocks.

Important Information:

Source: Company reports

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