Canada's largest banks have yet to report a significant slowdown in mortgage activity, as rising interest rates have failed to quell housing demand and home prices have continued to rise through the summer. Still, Fitch Ratings sees the potential for both increasing household leverage and rising rates to begin affecting mortgage banking results in the coming quarters.
Mortgage balances for the large Canadian banks grew in third-quarter 2013 as consumers re-entered the housing market to lock in rates, possibly fearing that they would rise further. This activity supported the mortgage business as well as some additional covered-bond issuance. Additionally, provision expenses remained very modest as overall credit quality and home prices continued to be strong. Market conditions have remained favorable in spite of high consumer indebtedness, rising inventories in some markets, and efforts by government authorities to slow activity in the Canadian housing market.
Statistics Canada reported in September that the ratio of household debt to income rose to a record high of 163.4% in the second quarter, up from 162.1% in the prior quarter. In part, the increase in household leverage may have reflected normal seasonal patterns, as home-buying activity picked up in the spring. In addition, borrowers may have been pushed into the market as rates began to rise in May and June.
Canada's home-price index hit another record in August, suggesting that rising mortgage rates are not yet having a significant impact on overall housing market demand. However, as affordability becomes a bigger issue for borrowers, we expect some additional pressure on mortgage origination volumes, and perhaps home prices in certain geographies, over the balance of the year and moving into 2014.
Government policies continue to take aim at cooling the housing market in an orderly manner. Last year, amortization periods for insured mortgages were shortened, reducing affordability. More recently, governmental bodies have only allowed uninsured mortgages to be included in covered-bond programs. This should have the effect of lowering the amount of balance sheet liquidity banks can create from mortgages through covered-bond programs.
We continue to believe, in general, that the Canadian housing market and mortgage balances will begin to plateau over the next one to two years, which would unfavorably impact both earnings and balance sheet ratios of the largest Canadian banks.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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