BUSINESS
05/06/2014 05:10 EDT | Updated 07/06/2014 05:59 EDT

OECD Sees 'Housing-Related Risks' In Canada, Wants Mortgage Reform

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Canada should reduce the risk of a housing correction by making mortgage lenders shoulder more risk, the OECD says in a new forecast.

The organization says it expects Canada’s economy to pick up steam in the next few years, with growth rising to 2.75 per cent in 2015, from 2.5 per cent this year.

But its forecast sees risks to the economy in the form of the country’s housing market, which has been the subject of a heated debate over the possibility of a housing bubble.

“To reduce housing-related risks to financial stability and improve lender incentives, mortgage-insurance coverage should be limited to only part of lenders’ losses,” the OECD recommends in its report.

In other words, the OECD is suggesting Canada’s taxpayer-backed mortgage insurer, CMHC, shouldn’t insure an entire mortgage, but rather only part of it, leaving some of the risk with the lender. Presumably, this would make lenders more cautious about issuing mortgages.

The International Monetary Fund said something similar last year when it suggested that Canada phase out or privatize CMHC. The group said taxpayers were shouldering too much of the risk in the housing market.

Canadian banks "lend too much to mortgages and too little to small and medium enterprises," IMF Canada mission chief Roberto Cardarelli said, distorting the economy in favour of housing development.

Some economists have argued that the expansion of CMHC mortgage insurance has made mortgage lending in Canada irresponsible.

CMHC itself has been taking steps to rein in the mortgage market. It recently stopped insuring mortgages for second homes, and for self-employed people who cannot prove their income.

The government-run mortgage lender said its insurance portfolio will drop to $545 billion this year, from $557 billion in 2013, the second year in a row the number has shrunk.

That may be a sign Canadians are paying off their mortgages faster than they are taking on new ones, but market observers suggest it’s also a sign CMHC is taking a smaller role in the market, leaving more room for private mortgage insurers.

The Canadian Press reports:

PARIS - A leading international organization warned Tuesday that the global economy will grow by less than expected this year after it lowered its forecasts for the United States and China.

The Paris-based Organization for Economic Co-operation and Development said the global economy will grow by 3.4 per cent this year, down from its forecast of 3.6 per cent growth last November.

The OECD, a think-tank for the world's most developed countries, cut China's growth forecast this year to 7.4 per cent from 8.2 per cent in November. Meanwhile, the U.S. economy is forecast to grow 2.6 per cent this year against last November's 2.9 per cent estimate.

Economic growth in Canada is projected to accelerate to 2¾ per cent by 2015.

"Exports are set to gain momentum, supported by stronger foreign-market growth, the recent currency depreciation and continuing energy-sector expansion," the OCED said.

"With economic slack fully absorbed, inflation is projected to rise to nearly 2 per cent by late 2015."

It said as inflation approaches the 2 per cent target, monetary accommodation should be progressively withdrawn.

"Fiscal consolidation should continue as planned. Most notably, provincial governments should continue to work on reforms that would limit growth in health-care expenditures," the think-tank said.

In its half-yearly economic outlook, the OECD also cut its 2014 forecast for Japan, to 1.2 per cent from 1.5 per cent. However, it raised its growth forecast for the 18-country eurozone to 1.2 per cent from 1.0 per cent.

The OECD warned that "financial tensions in emerging markets are one risk that could blow the global recovery off course," while falling inflation in the euro area was another cause for concern.

The body urged central banks in the main OECD areas to keep monetary policy "accommodative," given stubbornly high unemployment, below-target inflation and high levels of government debt.

In particular it called on the European Central Bank to act decisively to lift inflation and to be prepared to take "non-conventional stimulus" measures if needed.

_ With files from The Canadian Press.

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