This outsized figure is but part of a more complicated story, according to the agency. Moody’s emphasized the crucial role that low interest rates have played in driving a widespread appetite for mortgages and properties—in turn leading to seemingly inexorable home price hikes that might ultimately prove fatal to the nation’s financial system.
“This cycle is inducing fears of a bubble. If a recession were to hit the economy, many households would find themselves with negative equity and reduced incomes, raising the spectre of a swell in non-performing loans as homeowners default,” the report cautioned, as quoted by the Financial Post.
Moody’s added that while banks hold the loans, over half of mortgages across the country are insured by the 100-per-cent federally-backed Canada Mortgage and Housing Corporation.
“Mortgage insurance is required for loans obtained with less than a 20 per cent down payment, which implies that the loans CMHC is insuring have a smaller-than-average equity cushion,” Moody’s economist Brendan LaCerda said.
LaCerda hastened to note that the possibility of a major slowdown remains low, but “supposing such a severely adverse scenario comes to pass, the ability of the government to absorb CMHC’s losses is worth considering.”
Fortunately, Canada’s debt-to-GDP ratio of around 79 per cent of GDP in the first quarter of 2017 has placed it on stable footing relative to other industrialized nations.
“Even if CMHC realized a total loss on its more than $500 billion of insurance guarantees, which is nonsensical given the collateral value of the underlying homes, and the government completely bailed them out, its debt-to-GDP ratio would rise to about 105 per cent,” LaCerda explained. “Such an increase would raise Canada above the U.S. at 99 per cent but still keep it below many of Europe’s largest economies.”
In its latest report, Moody’s Analytics stated that Canada’s total outstanding credit to the non-financial sector—which includes households, non-profit institutions serving households, and financial corporations apart from banks—is at 217 per cent of GDP in Q1 2017, far above the average credit outstanding in this category for 42 developed countries (154 per cent) in the same time frame.