Canada Mortgage and Housing Corporation (CMHC) says house prices could fall 47.9 per cent peak-to-trough with an unemployment rate of 25 per cent in its worst case scenario.
That worst case outlook is for a W-shaped recovery, which is a partial recovery followed by a resurgence of COVID-19 leading to a prolonged recession and a loss of confidence. The scenario assumptions include no government assistance, stocks and oil would fall, and four mid-sized financial institutions and one private mortgage insurer would fail.
CMHC says without government intervention in such a scenario, its solvency and capitalization would be in question. Even with help, the agency says prices would fall 31.8 per cent and the unemployment rate would be 24.2 per cent.
In a U-shaped scenario, which involves a steep but short peak-to-trough decline in GDP of 7 per cent before recovery, it sees prices falling 33.9 per cent and an unemployment rate of 14.8 per cent.
CMHC CEO Evan Siddall made headlines in May when he forecast a decline in average house prices of 9 to 18 per cent in the coming 12 months, but that hasn’t panned out so far with record price appreciation in many markets.
Types of loans most at risk
The scenarios are part of CMCH’s stress test, which it says is intended to mitigate risk.
"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,” said CMHC’s chief risk officer Nadine Leblanc, in a release.
“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."
CMCH also looked at current loans at risk. Oil producing provinces are at higher risk than other parts of the country. People working in the service sector are at higher risk because of steep jobs losses compared to technology, education, and government sectors. It also says 70 per cent of its condo loans are at risk of being underwater.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.