Canada Mortgage and Housing Corporation (CMHC)’s stress testing of its own capital and liquidity levels shows that the impact of a range of pandemic scenarios is mitigated through actions taken by the government and CMHC management.
The scenarios are for testing purposes only and are not predictions or forecasts.
As a stabilizing force in Canada’s housing system, CMHC’s role as a responsible risk manager includes seeking out extreme, almost unimaginable situations and examining how well we can respond and withstand them.
This year’s stress testing exercise is unique and differs from past years in that we tested for a real-world crisis as it developed in real time. This required flexibility and creativity as we shifted our stress testing models to look at pandemic scenarios of varying degrees of plausibility and severity, even as events continued to unfold.
Through the crisis, CMHC took several coordinated measures in order to support financial stability including launching crisis products and temporarily suspending dividends. The stress test exercise validated the importance of these measures and their positive impact on housing market stability.
A series of pandemic stress scenarios including sensitivity analysis to key macroeconomic variables, were completed between Q1 and Q3 2020, reflecting different severity, speed and shape of recovery. The impacts of these scenarios fall into two distinct categories: plausible and implausible, with varying degrees of severity. Given this exercise was completed between Q1 and Q3 2020, results do not include data available from that point to the publication date.
- U-Shaped Recovery (Moderate)
In this scenario, pandemic measures prove successful, economic activity sees a steep but short decline before bouncing back relatively quickly. This assumes a cumulative, peak-to-trough decline in GDP of 7%. This is the least severe scenario.
- W-Shaped Recovery with government support (Severe)
This scenario assumes a partial recovery, followed by a return of COVID-19 outbreaks, loss of confidence and a prolonged recession. Government intervention limits impact. This assumes a sharp and immediate decline in equity and oil prices, the failure of four mid-size financial institutions and one private mortgage insurer.
- W-Shaped Recovery with government support + Cyber-attack (Severe)
- This scenario also assumes a W-shaped recovery (albeit with less severe economic assumptions compared to the W-Shaped with government support scenario) combined with a cyberattack, The goal was to assess an imminent cyber-attack on the financial system during COVID-19 outbreaks.
- W-Shaped Recovery without government support (Very Severe)
- This simulation mirrors the above W-shaped with government support scenario but assumes no government intervention. The goal was to assess the mitigating effect of government support on businesses and individuals to better reflect a stressed version of the current situation.
- CMHC would remain solvent and well capitalized in all scenarios with the exception of the Very Severe one. In this scenario, CMHC would need to call upon its recapitalization plan.
- In each of the scenarios, CMHC retains access to sufficient liquidity to meet its insurance and Timely Payment Guarantee (‘TPG’) obligations.
- The range of estimated losses in mortgage loan insurance for the 10-year period between 2020 and 2029 is between $3.61B and $15.30B. This wide range reflects the varying assumptions in the scenarios and the high level of uncertainty in outcomes. The percentage of deferred mortgages that recover is also another key factor for estimating future losses.
- The shape of recovery and the availability of government support will determine the economic outcome. Compared to baseline projections, a second COVID-19 wave may create significantly higher risks. Our models indicate that the impact of these risks may vary based on borrower’s geographical location, type of employment as well as dwelling type, for example:
- Loans originating from oil-producing provinces show higher risk compared to other regions across the country.
- Borrowers employed in the services sectors produced the highest simulated loss rates. Borrowers in the technology, education, and government sectors were expected to perform better than the rest.
- Recent analysis of house prices shows that condominiums, despite representing only 10% of the portfolio, account for almost 70% of loans currently at risk of being underwater (i.e. the loan’s outstanding balance is higher than the value of the home). This is mostly driven by significant price declines in condos in Calgary and Edmonton.
CMHC continues to closely monitor the changing situation concerning the COVID-19 pandemic as well as the related housing market risks. We will continue to play our role as Canada’s authority on housing as well as continue to contribute to the financial stability of the housing market and financial system while providing ongoing support for Canadians in housing need.
The table below includes scenario assumptions (change in house prices and unemployment rate peak) and results (losses and lowest point of capital available) under each scenario. The results assume management actions, described in more detail in the backgrounder.
|For the period 2020 – 2029||Baseline||U-Shaped Recovery (Moderate)||W-Shaped Recovery w/government support (Severe)||W-Shaped Recovery w/government support + Cyber-attack)||W-Shaped Recovery w/o government support (Very Severe)|
|Cumulative claim losses — Insurance||$3.610||$9.664||$9.120||$8.417||$15.295|
|Lowest point of capital available (% MICAT)**||203.0%||157.3%||117.7%||174.2%||-62.7%|
|Change in housing prices (peak-to-trough)||-13.7%||-33.9%||-31.8%||-36.82%||-47.9%|
|Duration with declining House Price (quarters)||5||8||11||8||12|
|Peak unemployment rate||18.9%||14.8%||24.2%||24.1%||25.0%|
|Duration with increasing unemployment rate (quarters)||3||6||5||4||3|
* In billions, unless indicated
** The Mortgage Insurer Capital Adequacy Test (MICAT) is the ratio of capital available to regulatory capital required for mortgage loan insurance. Below 100% MICAT, an insurance company may no longer be allowed to write new business. While a level below 0% MICAT typically indicates insolvency,, capital transfers between lines of business results in CMHC remaining solvent at the enterprise level in the ”W-Shaped Recovery w/o government support (Very Severe)” scenario despite MICAT falling below 0%.
“As we continue to deal with the impacts of the COVID-19 pandemic, it is important to monitor the evolving financial risks facing Canadian housing markets including an uneven economic recovery impacting most vulnerable populations. Stress testing exercises like this are an essential part of effective risk management and vitally important to the long-term health and stability of Canada’s housing finance system.”
Backgrounder & Definitions:
- CMHC follows the guidance set by the Office of the Superintendent of Financial Institutions (OSFI) with respect to stress testing. CMHC also develops its own stress testing cases for business planning purposes.
- The underlying variables within each of the stress testing scenarios were developed based on a combination of hypothetical and historical economic analysis.
- Change in housing prices from peak-to-trough describes the highest and lowest point of housing prices during the forecast period of the crisis scenario.
- Management actions could include suspension of the dividend, transferring capital from mortgage funding to mortgage insurance, accessing the expanded Crown Borrowing Program (CBP) or expanded recapitalization authorities.
CMHC Media Relations