Ontario's suite of new measures aimed at curbing runaway growth in Toronto housing prices could similarly slow growth in mortgage lending, but Canada's largest banks are expected to absorb any impact comfortably.
A list of 16 recommendations put forward by the Ontario government includes a 15-per-cent tax on foreign home buyers, as well as expanded, province-wide caps on rent increases and a green light to cities to introduce a property tax on vacant homes.
The biggest impact for banks will likely come from the foreign buyers tax, at least in the short term. National Bank Financial Inc. estimates that foreign residents make 5 to 15 per cent of Greater Toronto Area purchases, and those sales could diminish noticeably.
But the ultimate risk to banks from a slowing mortgage market – that it might translate to slower growth in earnings, which in turn could curb increases in dividend payouts and hurt bank valuations – still seems remote, banking observers say. As long as the rules work as intended, and the provincial government successfully walks the tightrope of dampening increases in house prices without actually shrinking the mortgage market, the big banks' lending should remain intact.
The new measures "could curb mortgage growth for the banks," said Gabriel Dechaine, an analyst at National Bank Financial, in a research note. But most large Canadian banks had already slowed the rate of growth in their mortgage portfolios, and Ontario's rules shouldn't "materially alter" the broader outlook for bank stocks.
"As long as mortgage volumes are not going down, it won't decrease earnings, and won't put any pressure on the payout ratios," said John Aiken, an analyst with Barclays Capital Canada Inc., in an interview.
Meanwhile, investors who typically look for steady growth in banks' lending are mostly expected to give institutions a pass as long as banks continue to grow over all. Those same investors have had pointed questions about mortgages, but "have been reasonably agnostic about growth and where that has come from," Mr. Aiken said.
Generally speaking, banks appear comfortable with the health of their mortgage portfolios, even when faced with the prospect of a slowdown in Ontario's housing market. At most large banks, anywhere from 45 to 60 per cent of mortgages are insured, and the ratios between the size of loans and the value of homes still look healthy.
"We're comfortable with the quality that we're seeing come through," said Royal Bank of Canada chief executive Dave McKay, speaking to reporters earlier this month. New federal rules that force buyers to meet tougher stress tests mean potentially riskier borrowers "are choosing to exit the market."
A spokesperson for the Canadian Bankers Association said only that its members "are continuing to assess their mortgage portfolios" in the context of their risk-appetite frameworks.
Among the county's six largest banks, Toronto-Dominion Bank, Bank of Nova Scotia and Canadian Imperial Bank of Commerce have the largest proportional exposures to Ontario's new mortgage rules, as roughly half of their domestic mortgages and home equity lines of credit are in the province.
CIBC had one of the fastest-growth rates in new mortgages over the past year, up 12 per cent in the first quarter from a year earlier. A spokesperson for the bank declined to comment on the measures on Thursday.
Spokespeople for TD, BMO and National Bank also declined to comment, while representatives for RBC and Scotiabank could not be immediately reached.
The broader concern for banks is economic in nature – that if the housing market were to crash, and unemployment were to rise at the same time, it could lead to somewhat higher losses on credit card and auto loan portfolios, which are also important components of bank lending.
"This can be viewed as adequate tapping of the brakes without jamming on the brakes," Mr. Aiken said. "Most of the measures are going to impact players outside of … your average home owner."
Banks have generally been supportive of government intervention to try to cool the market, but have warned against hasty measures that could trigger unforeseen effects. Mr. McKay was particularly vocal about the need for federal, provincial and municipal leaders to co-ordinate any new policies or regulations.
"If it's not in a co-ordinated fashion, we could do real damage," Mr. McKay said in early April.
Mr. Dechaine, the National Bank analys, still sees the Ontario government's actions as benign, but said that it is worth considering "potential negative outcomes," given that the housing sector accounts for about 20 per cent of Ontario's gross domestic product, both directly and indirectly.
"If regulation results in job losses and reduced economic activity in the housing sector, then the banks could have a problem," Mr. Dechaine said in his report, but added: "We believe it is too early to make this call and there are some offsetting factors ([for example], a tax on vacant land could spur development) to consider."
The Canadian real estate market has been looking overheated for years, said Prem Watsa, head of insurance and investment firm Fairfax Financial Holdings Inc., at the company's AGM in Toronto on Thursday.
Mr. Watsa pointed to housing bubbles and corrections in countries, such as Ireland and Dubai, that caused major problems for banks that backed mortgages. "On real estate prices, my view is the same as its been now for years, is that it's going to come down, and lots of people are going to get hurt," he said.
With files from Jacqueline Nelson
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