Some households have thus taken out larger mortgages, longer amortizations and variable rate mortgages, which are more exposed to rising rates. Today, as interest rates rise, the housing market is weakening, according to the report.
DBRS noted that national housing prices have fallen for three consecutive months. In June, prices suffered their biggest monthly decline since 2005.
These trends are expected to continue as rates rise.
“While the extent of the impact of monetary policy tightening on the housing market is not yet clear, rising rates will continue to erode housing affordability at current price levels, further reducing demand and will put downward pressure on house prices,” the report predicted.
In addition, rising rates will hurt speculators in the real estate market.
“When heavily indebted speculators are required to renew/fund their loan at higher rates, they may begin to experience negative cash flow on their real estate investments and decide to sell,” the report warns.
Despite these trends, the report indicates that Canada’s major banks are generally well positioned.
The labor market remains strong and the financial system is “well regulated, with strong balance sheets, robust levels of internal capital generation and capital buffers that should be able to withstand a significant drop in house prices,” says The report.
DBRS expects banks to begin building credit loss provisions on performing loans in coming quarters “to account for economic uncertainty and rapidly rising interest rates.”
“The biggest risk, however, is that a downturn will lead to job-losing shocks, as a surge in unemployment would lead to a steeper drop in house prices,” DBRS concludes.
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