B.C.’s financial system is especially vulnerable to housing corrections as the province plays host to many of Canada’s riskiest mortgages, according to an analyst
The British Columbian economy would face the greatest dangers in the event of a collapse in the overheated Canadian housing sector, as the province plays host to many of the country’s highest-valued mortgages, according to an industry observer.
In his analysis for the Vancouver Sun, columnist Vaughn Palmer stated that the Bank of Canada’s latest report on the risks to Canadian finance revealed B.C.’s exceptional vulnerability to housing corrections.
“What if housing prices were to drop by 15 per cent? The bank calculates that about one mortgage in eight would be plunged underwater, meaning the dollar indebtedness would be greater than the fair market value of the home,” Palmer wrote.
“What if housing prices were to drop by 25 per cent? In that case, almost one mortgage in four would sink into negative territory,” he added. “Some 600,000 mortgage holders would experience a reversal in the first instance and more than one million in the second.”
Palmer argued that this weakness in the province’s financial system can be attributed to the sheer number of risky mortgages—that is, those valued at 450 per cent or more of a household’s annual income—in the red-hot Vancouver market and the surrounding locales.
“As of last year, fully a third of all the mortgages that were taken out in Vancouver were in the heavily indebted category. The provincial capital region was not far behind,” he said.
This precarious situation would rush headlong towards a vicious cycle, and eventually to a point of no return, should the national economy suffer from a sudden and massive shock, the BoC report warned.
“In this risk scenario, a severe recession in Canada generates a sharp increase in unemployment across the country that places many highly indebted households under financial stress and causes a broad-based correction in house prices,” Palmer quoted the report as saying.
The complex interactions between housing and the economy suggest that no perfect solution to the affordability crisis exists, and that the best that Canadians could hope for is a circumspect approach, the analyst said.
“Governments should proceed cautiously when interfering in the housing market, particularly where prices are most inflated as they are here in B.C.,” Palmer said.
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In his analysis for the Vancouver Sun, columnist Vaughn Palmer stated that the Bank of Canada’s latest report on the risks to Canadian finance revealed B.C.’s exceptional vulnerability to housing corrections.
“What if housing prices were to drop by 15 per cent? The bank calculates that about one mortgage in eight would be plunged underwater, meaning the dollar indebtedness would be greater than the fair market value of the home,” Palmer wrote.
“What if housing prices were to drop by 25 per cent? In that case, almost one mortgage in four would sink into negative territory,” he added. “Some 600,000 mortgage holders would experience a reversal in the first instance and more than one million in the second.”
Palmer argued that this weakness in the province’s financial system can be attributed to the sheer number of risky mortgages—that is, those valued at 450 per cent or more of a household’s annual income—in the red-hot Vancouver market and the surrounding locales.
“As of last year, fully a third of all the mortgages that were taken out in Vancouver were in the heavily indebted category. The provincial capital region was not far behind,” he said.
This precarious situation would rush headlong towards a vicious cycle, and eventually to a point of no return, should the national economy suffer from a sudden and massive shock, the BoC report warned.
“In this risk scenario, a severe recession in Canada generates a sharp increase in unemployment across the country that places many highly indebted households under financial stress and causes a broad-based correction in house prices,” Palmer quoted the report as saying.
The complex interactions between housing and the economy suggest that no perfect solution to the affordability crisis exists, and that the best that Canadians could hope for is a circumspect approach, the analyst said.
“Governments should proceed cautiously when interfering in the housing market, particularly where prices are most inflated as they are here in B.C.,” Palmer said.
Related Stories:
Positive economic outlook for B.C., Ontario up to the end of 2017
BC's lackadaisical response to foreign money not helping the market – observer
