Canadaâs housing market could be headed for âa hard landing,â the International Monetary Fund says, warning that an âoverheated housing marketâ and record-high household debt remain drags on the domestic economy.
In a posted to the agencyâs website, Hamid Faruqee and Andrea Pescatori hail how the Canadian economy weathered the 2008 financial crisis, but note that âcertain financial risksâ remain at play, namely: âits overheated housing markets and high household debt.â
While household debt has recently stabilized, it has âincreased to historical highs over the past decade,â and now rests at 150 per cent of disposable income. That is âone of the highestâ 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 Canadaâs 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 âlowest affordability globally,â the commentary said.
âBut with weaker terms of trade, lower growth, and prospects of higher U.S. interest rates, Canadaâs overvalued housing market may be cooling off,â Faruqee and Pescatori write.
âFor 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.â
The report notes that the federal government has taken steps to curb Canadiansâ accumulation of household debt, particularly in the tightening of mortgage rules in recent years.
However, âthese steps may have been only partially effective in restraining credit growth,â 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 âare not subject to the same regulatory tightening,â the commentary notes, and now make up âthe bulk of mortgage originations and help fuel housing demand.â
Rising prices of single-family homes in the fast-growing markets âseem tied to uninsured mortgages,â the economists write.
âIf financial risks start rising again, policymakers may need to take further action to tighten rules on these loans.â
The government should consider reducing taxpayersâ exposure to the risks associated with federal mortgage insurance and increase private sector involvement, which âcan further encourage prudence.â
âGiven the systemâs current reliance on insured mortgages, however, changes would need to be gradual to steadily encourage the private sectorâs role to expand as the public sectorâs recedes.â