Macquarie Research is downgrading a slate of Canadian lenders, citing increased risk of a major housing correction. In a research note, Macquarie analyst Jason Bilodeau wrote that the firm was cutting CIBC, Genworth MI and Home Capital Group due to concerns the domestic housing market has overextended itself.
“Most relevant metrics are currently at unprecedented levels. [Household] leverage is at all-time highs. Home prices relative to income are 2.5 [standard] deviations above their historical average,” Bilodeau wrote. “Many key metrics are at or above levels seen in the U.S. prior to its most recent housing crisis and are growing worse.”
The research firm acknowledged calls for a major housing correction are “hardly new,” but the data are “starting to confirm problems in the most extended markets.”
The MLS benchmark home price in Toronto rose more than 17 per cent over the course of 2016, and benchmark prices in the red-hot Vancouver market rose 17.8 per cent over the course of the last year. A combination of British Columbia’s 15 per cent tax hike on foreign buyers and new mortgage stress tests have helped curtail activity in the Vancouver market, as sales volume plunged nearly 40 per cent in December.
Macquarie said its base case remains a material moderation, not a full-on crash, but said high valuations in the banking sector leave the trio of downgraded names at risk.
“The recent pace of price appreciation is nearly unprecedented, housing is more important to the economy than it has ever been and fiscal policy is already highly accommodative,” Bilodeau wrote. “At the same time, bank stocks are trading near peak multiples.”
TD remains Macquarie’s one outperform-rated bank, due to its U.S. exposure.