Canada鈥檚 housing market could be headed for 鈥渁 hard landing,鈥� the International Monetary Fund says, warning that an 鈥渙verheated housing market鈥� and record-high household debt remain drags on the domestic economy.
In a posted to the agency鈥檚 website, Hamid Faruqee and Andrea Pescatori hail how the Canadian economy weathered the 2008 financial crisis, but note that 鈥渃ertain financial risks鈥� remain at play, namely: 鈥渋ts overheated housing markets and high household debt.鈥�
While household debt has recently stabilized, it has 鈥渋ncreased to historical highs over the past decade,鈥� and now rests at 150 per cent of disposable income. That is 鈥渙ne of the highest鈥� among OECD member countries, the commentary noted.
At the same time, house prices have risen by more than 60 per cent across the country over the past 15 years, and Canada鈥檚 urban centres are leading the charge, including Toronto and Calgary. Vancouver, another city where house prices have soared, now ranks second only to Hong Kong in terms of the 鈥渓owest affordability globally,鈥� the commentary said.
鈥淏ut with weaker terms of trade, lower growth, and prospects of higher U.S. interest rates, Canada鈥檚 overvalued housing market may be cooling off,鈥� Faruqee and Pescatori write.
鈥淔or example, there have been some recent signs that home listings to sales are rising noticeably in oil-rich Alberta, and we will need to keep an eye on the risk of a hard landing.鈥�
The report notes that the federal government has taken steps to curb Canadians鈥� accumulation of household debt, particularly in the tightening of mortgage rules in recent years.
However, 鈥渢hese steps may have been only partially effective in restraining credit growth,鈥� the commentary notes.
One result of the tightening of mortgage rules is that uninsured mortgages are filling the gap for would-be homeowners who can afford a down payment of about 20 per cent. These mortgages 鈥渁re not subject to the same regulatory tightening,鈥� the commentary notes, and now make up 鈥渢he bulk of mortgage originations and help fuel housing demand.鈥�
Rising prices of single-family homes in the fast-growing markets 鈥渟eem tied to uninsured mortgages,鈥� the economists write.
鈥淚f financial risks start rising again, policymakers may need to take further action to tighten rules on these loans.鈥�
The government should consider reducing taxpayers鈥� exposure to the risks associated with federal mortgage insurance and increase private sector involvement, which 鈥渃an further encourage prudence.鈥�
鈥淕iven the system鈥檚 current reliance on insured mortgages, however, changes would need to be gradual to steadily encourage the private sector鈥檚 role to expand as the public sector鈥檚 recedes.鈥�
