11/26/2014 12:44 EST

IMF: Uninsured Mortgages Booming In Canada, Pose Risk To Economy


There are signs of overvaluation in Canada’s housing market, and the government may need to tighten rules on uninsured mortgages to keep things from getting out of hand, the International Monetary Fund says.

IMF researcher Hamid Faruqee said house prices in Canada are 5 to 20 per cent higher than economic fundamentals indicate they should be, Reuters reported.

In its latest report on Canada, the IMF still expects a "soft landing" for the housing market but worries about the boom in uninsured mortgages, which it says are growing at a rate of 10 per cent per year and account for the “bulk” of new mortgages in the country.

“Further action may be needed if household balance sheet and housing market vulnerabilities resume rising,” the report said. It suggested shorter amortization periods for uninsured mortgages.

Uninsured mortgages require a minimum down payment of 20 per cent. Data on the size of mortgage down payments is lacking in Canada, but anecdotal evidence from banks suggests they are issuing more and more mortgages not covered by mortgage insurance.

Faruqee suggested the housing market could be in for a shock if interest rates rose quickly, but the IMF doesn’t see that happening. It says the Bank of Canada can hold off on hiking rates until “firmer signs ... emerge of a more balanced and durable recovery with stronger business investment.”

Business investment is another area the IMF is worried about when it comes to Canada. The report noted that strong economic growth in the U.S. and a weaker loonie have helped manufacturers and other exporters in recent months, but that hasn’t translated into stronger business investment.

Canadian businesses have mostly been putting money into replacing or upgrading existing facilities and not in long-term expansion, the IMF said. Hiring has been tentative; the report noted that a third of jobs created in 2014 have been part-time, higher than the historical average.

While it said Canada’s economy has performed well over the past year, the report noted that the “balance of risks is modestly tilted to the downside” for the country.

Among the risks: The falling price of oil, which could harm resource-rich areas, “external” risks, such as the slowdowns in China and Europe; and the possibility of “a sharper-than-expected correction in house prices.”

Despite the risks to the housing markets, the IMF says Canada's banking system is stable enough that it doesn't expect a banking crisis if house prices turned downward.

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