There is no direct connection between housing market and ratings of Canadian banks. There can be indirect connections between those two.
Record high personal debt and falling housing prices will dilute the net worth of many Canadian families. Mortgages and Line of Credits are two major sources of investments made by the banks. Both of them rely on the housing prices as their backstop beside the loan insurers. Once the housing prices start to fall the strength of the loan security will erode which will then increase the risk exposures of the loans.
Moody’s downgraded rating of six Canadian banks – including heavy weights like RBC, TD, BMO, Scotia and CIBC – pointing towards the raising risk from Canadian personal debt situation.
Teranet – in its recent data showed that Canadian housing prices fell in December, month over month. Tighter regulation along with fear of further housing price correction will continue to keep perspective buyers at the sideline till the situation stabilizes.
As an effect despite of higher bond yields, mortgage rates continue to stay at the lower levels. Competition in the market was already fierce and the recent situation in not helping either. Bond yields are raising as optimism is slowly returning in the market and once it starts to pull fixed interest rates up – we shall probably witness even worst correction.