NBC on Alberta Mortgage Defaults

AlbertaHousingWe’ve seen the headlines about the softening housing market in Alberta and Saskatchewan. But how much of a threat do declining home prices there pose to the rest of the country?

Little, according to a report from National Bank of Canada (NBC).

While the Canadian Real Estate Association reports that seasonally adjusted home sales in Alberta and Saskatchewan are down 33% from November (compared with a 3% decline nation-wide), report author and Senior Economist Marc Pinsonneault says, “To date there is no indication that the hit to the Alberta and Saskatchewan housing markets has propagated to large centres elsewhere in Canada, such as Toronto and Vancouver.”

In the last three months, home prices in Calgary have dropped 1.9% according to the Teranet-National Bank House Price Index. But Pinsonneault says one must keep in mind the 9.2% increase in prices in the nine months prior, on top of the 6.5% increase in 2013 and 4.1% gain in 2012.

More interestingly, NBC quantified that for a house purchased in 2013, for example, it would take a 30% price drop to trigger strategic mortgage defaults. That sort of selloff last happened in 1983-1984.

A strategic default is when someone stops making their mortgage payments despite being able to. It typically happens when the borrower’s mortgage is bigger than the home’s value. It’s especially prevalent when a mortgage is non-recourse, meaning the lender can’t come after the borrower for any shortfall after default.

“In Alberta and Saskatchewan, only uninsured mortgage loans are non-recourse,” notes Pinsonneault. And, in Saskatchewan, “even uninsured loans become full-recourse when renegotiated.”

“In the absence of some truly catastrophic turn of events, it is hard to see how a wave of strategic defaults in Alberta could shake the foundations of the Canadian banks to the point of triggering a severe contraction of credit,” he adds.

In general, a wave of strategic defaults would occur “only when home prices fell more than 20%,” writes Pinsonneault. “This happened in Alberta in the early 1980s, but even after two subsequent recessions has not happened since…”

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The other Big Banks aren’t sounding the alarm bells either. In RBC’s first-quarter earnings conference call, Chief Risk Officer Mark Hughes said the bank has been actively monitoring its portfolio in Alberta, and has been stress testing it under a scenario of sustained $45 oil, a significant increase in unemployment and interest rates, a national downturn in real estate as well as a recession in Alberta.

“Under this very extreme scenario, we have determined that the potential losses would still be manageable and within our risk appetite,” he said.

Other takeaways from the National Bank report:

  • It is estimated that non-insured loans in Alberta made up 5.3% of the Big Banks’ portfolio of residential mortgage loans in Canada
  • A 5.7% delinquency rate on uninsured loans would be necessary to double the delinquency rate for Canada as a whole—i.e., raise it by 30 basis points. We’re at 28 basis points currently, according to the latest CBA data
  • By comparison, the U.S. delinquency rate peaked at 5.1% following its housing bubble collapse

Steve Huebl, CMT

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