IMF Warns Canada 'Vulnerable' To Housing Market Shock

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The International Monetary Fund has issued a new warning about Canada’s housing market, saying that overheated house prices and high household debt levels are Canada’s “two main domestic vulnerable areas.”

In a note issued Monday, the IMF noted that Canadian house prices have grown by 60 per cent since 2000.

“Although household debt levels appear to have stabilized recently, they have increased to historical highs over the past decade, reaching over 150 percent of disposable income — one of the highest among member countries of the OECD,” the IMF said.

In a report released in January, the IMF estimated that Canada’s housing market is overvalued by 7 to 20 per cent, depending on the region -- a lower estimate than the Bank of Canada’s, which last fall estimated house prices to be overvalued by up to 30 per cent.

The new IMF report seems particularly concerned about the rise of uninsured mortgages, noting that they are an ever-larger part of Canada’s mortgage market and now account for a majority of all mortgages.

imf uninsured mortgage canada

Any mortgage that comes with a down payment of less than 20 per cent requires mortgage insurance in Canada.

“House price increases concentrated in single–family homes in fast-growing real estate markets seem tied to uninsured mortgages. If financial risks start rising again, policymakers may need to take further action to tighten rules on these loans,” the IMF wrote.

The average price of a single-family home in Toronto recently passed $1 million, and that could pose a problem for the housing market because the CMHC will not insure mortgages above $1 million.

“Now, a $1 million [house] is an average house so you are basically saying [the government] is not going to insure an average house,” Rob McLister of Canadian Mortgage Trends told the Financial Post.

The Post article reports that Toronto home buyers are resorting to subprime loans to afford homes in the city where prices have risen rapidly in recent years, and tripled over the past four decades.

The IMF report sees this sort of thing as “leakage” from Canada’s tighter mortgage lending rules. Despite several rounds of mortgage rule tightening by the government, which saw maximum insurable mortgage lengths reduced to 25 years, the agency still sees room for tighter rules.

“House price increases concentrated in single–family homes in fast-growing real estate markets seem tied to uninsured mortgages. If financial risks start rising again, policymakers may need to take further action to tighten rules on these loans,” the report stated.

Despite its concerns about uninsured mortgages, the IMF actually recommends that the federal government step back from insuring mortgages through the CMHC and let the private sector step in.

Many analysts have argued that government insurance of mortgages has eliminated risk for mortgage lenders, potentially encouraging irresponsible lending since taxpayers, not lenders, are on the hook for mortgage defaults.

“Given the system’s current reliance on insured mortgages, however, changes would need to be gradual to steadily encourage the private sector’s role to expand as the public sector’s recedes,” the IMF report stated.

The IMF sees signs that “Canada’s overvalued housing market may be cooling off” in the wake of the collapse in oil prices.

The latest signs of that cooling-off came from CMHC Monday, when the mortgage insurer reported a 16-per-cent drop in housing starts, to the lowest level since 2009, when Canada was recovering from the Great Recession.

Oil-rich Alberta’s housing market has been particularly hard hit, with sales in Calgary falling nearly 39 per cent in January.

In Alberta, “we will need to keep an eye on the risk of a hard landing,” the IMF said.

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