File photo of a home for sale in Springfield, IllSeth Perlman/The Associated Press
With the summer's sales data providing evidence that Canada's housing market is beginning to slow, BMO analyst John Reucassel decided to crunch some numbers to determine what this might mean for the big banks' mortgage businesses in the years ahead.
It`s an important question. Residential mortgages make up roughly two-thirds of the banks' Canadian loan portfolios, and have accounted for more than 75 per cent of total domestic loan growth over the last cycle.
The risks that stem from very low mortgage loan growth are more of a medium– to long-term phenomenon than a near-term fear, as Canadian consumers go through the process of deleveraging, Mr. Reucassel says. "Hopefully this slower mortgage loan growth coincides with modestly rising interest rates that help lift spreads," he adds, as rock-bottom rates have shrunk profit margins on the products.
Roughly half the dollar value of annual housing activity tends to translate into new residential mortgages, according to Mr. Reucassel. Since 1993 the dollar value of total residential housing activity (resales, new houses and renovations) has risen from $64-billion to an estimated $270-billion, a compound annual growth rate of 7.9 per cent.
Mortgage loans are likely to grow by six to seven per cent this year, versus 2011. But, using a base case 'soft landing' scenario for the housing market (a 10 per cent decline in the dollar value of resale activity in 2013, followed by a five per cent decline in 2014 as well as declining new housing and renovation activity), mortgage loan growth would slow to two to four per cent over the next two years, and one to two per cent after 2014, Mr. Reucassel estimates.
To push mortgage loan growth into negative territory over the next three to five years, the value of housing activity would have to fall by 35 per cent. 'While certainly in the realm of possibility given the recent experience in the U.S., this scenario appears to be a remote possibility given a reasonably healthy domestic job market and economic growth,' he says.
But, even an optimistic view of the housing market (a five per cent drop in resale volumes while prices hold steady) mortgage loan growth would slow from its pace of six to seven per cent this year to between three and four per cent from 2013 to 2017.
Diving deeper into that broader impact, Mr. Reucassel also took a look at condo exposure, noting that condos in Toronto and Vancouver remain the biggest source of concern within the real estate market from a credit perspective.
He estimates that Canadian banks have $92.1-billion of exposure to condos nationally, including $3.6-billion to developers and $88.5-billion in residential mortgages secured by condos. But $55.9-billion of that latter figure is insured by mortgage insurers, who will pick up the tab if the mortgage borrower defaults. As a result, the banks have about $36.2-billion in uninsured exposure to condos, which Mr. Reucassel says is a "manageable exposure level" representing about two per cent of their total loans.
His note shows that TD has by far the largest portfolio of mortgages on condos, at $30-billion, but it has insured a whack of those – $22.2-billion. The next largest portfolio of condo mortgages belongs to CIBC, which has $17.1-billion worth, of which $13.17-billion is insured.