Why Toronto-Dominion Bank Doesn’t Need to Worry About Falling House Prices

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and its investors can breath easy — the bank is well protected from Canada’s inflated real estate prices.

| More on:
The Motley Fool

For years now, analysts have been claiming that Canadian housing is overvalued, and that a correction – or worse – is imminent. Thus far, they have been wrong, and house prices have continued to climb. Unfortunately, that makes house prices look even more inflated.

This has consistently been a prime topic of conversation among investors in the Canadian banks. Specifically, investors are wondering what effect a housing correction would have on their bottom lines.

On that note, below we take a look at one of the country’s biggest banks, Toronto-Dominion Bank (TSX: TD)(NYSE: TD). When we look at the evidence, we find the bank is well-positioned in this environment. Below are three reasons why this is the case.

1. Mortgages are very safe

When faced with declining house prices, investors naturally worry about a bank’s mortgage loans. After all, mortgages – especially the subprime variety – are what sunk so many American banks during the financial crisis.

But in Canada, the story is very different. Most mortgages are insured by the CMHC, meaning that banks face no credit risk on these loans. And as of last year, about three quarters of TD’s mortgages were insured by the CMHC.

With uninsured mortgages, TD on average lends out 70% of a home’s value. In other words, if an average borrower defaults, then his house would have to decline by 30% before TD loses any money.

It’s no wonder that last year TD lost only $16 million from residential mortgages, despite holding over $175 billion in mortgages throughout the year. Even if this $16 million number doubles next year, no shareholder will notice.

2. Rising interest rates: a good thing!

As it stands, interest rates remain very low in Canada, and this is a main reason why house prices are so high. But that begs the question: when interest rates rise, will that spell trouble for Canada’s indebted population? And what effect will that have on the banks?

Well, actually the banks are hoping interest rates will rise. The reason is quite simple – when banks lend out money, they are not earning very much interest income. When interest rates rise, these banks will be able to charge more for their loans.

And in any case, interest rates are likely to remain low for quite some time.

3. The right exposure

The newest worry seems to be that lower oil prices will lead to a housing correction. After all, Canada’s economy is very dependent on energy.

But where TD is concentrated, oil’s slide is actually good news. In Canada, nearly half of loans are in Ontario, which benefits from lower gas prices and a lower Canadian dollar. Down in the United States, a lower gas price means more money in the pockets of TD customers.

So TD’s customers have little to worry about oil’s slide. And this means they should have no trouble paying back their TD loans.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Bank Stocks

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

Is TD Bank Stock a Good Buy Now?

Here’s why TD Bank stock looks even more attractive to buy for the long term after its upbeat second-quarter earnings.

Read more »

consider the options
Bank Stocks

Is TD Bank Stock the Best Bank Stock for You?

TD Bank stock is reflecting a lot of the negative news. It remains a top bank stock trading at attractive…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Prediction: These 2 Canadian Bank Stocks Are Next in Line to Pop

National Bank of Canada (TSX:NA) and another bank stock look ready to roar higher in the second half of 2024.

Read more »

analyze data
Bank Stocks

Should You Load Up on TD Bank Stock?

TD Bank (TSX:TD) stock has bounced back a bit since its recent lows, but the best may be on the…

Read more »

Businessperson's Hand Putting Coin In Piggybank
Stocks for Beginners

3 Dividend Stocks Every Investor Should Own

Heading into earnings season, which bank stocks are best for dividend income?

Read more »

stock research, analyze data
Bank Stocks

Should Investors Buy the Correction in TD Stock?

TD stock is down more than 25% from the 2022 high. Is it finally time to buy?

Read more »

thinking
Bank Stocks

Could Royal Bank Stock Reach $200?

Growing rate cut hopes and improving analysts’ expectations from Royal Bank’s financial results could help its stock maintain strong upward…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Bank Stocks

1 of the Best Dividend-Paying Bank Stocks to Buy Now and Hold Forever

Here’s a very reliable, dividend-paying Canadian bank stock you can buy at a bargain right now and hold for the…

Read more »