Regulator requires banks to conduct stress tests for Vancouver, Toronto home prices

OTTAWA – Canada’s banking regulator is requiring certain financial institutions to conduct stress tests to determine how they would deal with a 50 per cent downturn in Vancouver real estate prices and a 40 per cent cut in Toronto home prices.

By way of comparison, these same institutions will also be required to do stress tests that account for a 30 per cent drop in housing prices in all other areas of the country.

Annik Faucher, spokeswoman for the Office of the Superintendent of Financial Institutions Canada, said the changes affect roughly 70 institutions that the organization regulates, but exclude Canada’s big six banks and HSBC — who have their own separate stress test scenarios provided by OSFI and the Bank of Canada.

The key changes announced Tuesday by OSFI come on the heels of a letter it sent earlier this month to all federally-regulated financial institutions reminding them to exercise prudence when underwriting home mortgages.

The regulator identified several areas that it said it will be watching closely, including the verification of a borrower’s income, debt service ratios and the reliability of property appraisals.

Last month, the Bank of Canada raised concerns about the housing market and noted that vulnerabilities due to the continued rise of household debt and greater imbalances in regional housing markets were higher than they were six months ago.

Note to readers: This is a corrected story. Previous version did not specify that the stress tests did not apply to certain financial institutions.