Ontario’s plan for a foreign buyer tax in the Toronto real estate market is a positive for the credit profile of the Canadian banks, according to a report published on Monday by Moody’s Investors Service.
The provincial government’s effort to cool the housing market in Toronto by introducing a 15% tax on foreign buyers of residential real estate is “credit positive” for the Canadian banks “because it will reduce the potential for a house price bubble in their uninsured mortgage portfolios by slowing the pace of house price growth and reducing the potential for precipitous price declines,” the report says.
Moody’s notes that overvaluation in the real estate market is a risk for the banks because banks become more exposed to loss from mortgage defaults if an overheated market leads to a substantial drop in house prices. Indeed, it notes that Toronto has experienced precipitous house price declines in the past, most recently in the early 1990s.
The banks have significant exposure to Ontario’s market. Moody’s reports that the Canadian banks held more than $1 trillion in residential mortgage loans at the end of 2016, and that almost 50% of that is in Ontario.
Read: Ontario to tax foreign buyers in effort to cool housing market