IMF advises against measures to boost Canadian housing market

Measures to boost Canada’s housing market amid high household debt would be “ill-advised,” a new report from the International Monetary Fund (IMF) says.

“The government is under pressure to ease macroprudential policy or introduce new initiatives that buttress housing activity,” the IMF report said. “This would be ill-advised, as household debt remains high and a gradual slowdown in the housing market is desirable to reduce vulnerabilities.”

The international body noted that low interest rates have contributed to a booming Canadian housing market. Policy including a mortgage stress test that came into effect at the start of 2018 contributed to slowing the rise of household debt, it said.

Real estate groups and others have lobbied government to overturn the mortgage rule changes. In their pre-election budget, the federal Liberals introduced a first-time homebuyer incentive that allows clients who have the minimum down payment for an insured mortgage to apply to finance a portion of their home purchase through a shared equity mortgage with the Canada Mortgage and Housing Corporation (CMHC).

Last week, Conservative leader Andrew Scheer said a Conservative government would rework the mortgage stress test to make homes more affordable.

In its latest financial system review, the Bank of Canada said vulnerabilities linked to housing and high household debt have “declined modestly but remain significant.” It attributed improvements to slower credit growth since 2017 that coincided with interest rate hikes and stricter mortgage rules.

“With [macroprudential] measures working well, their effectiveness should not be diluted by home buyer initiatives that inadvertently increase household debt,” the IMF report said.

Instead, governments at the federal, provincial and municipal level should work together on a strategy to increase housing supply.

The Organization for Economic Co-operation and Development (OECD) made a similar recommendation for housing supply in a separate report on Tuesday. The OECD noted slowing household credit growth and said “no further tightening in macroprudential policy is called for at this time.”

A sharp housing market correction is a key risk, the IMF said. Its Financial Sector Assessment Program stress test examined what would happen in the event of a severe recession occurring alongside significant financial market stress, exchange rate depreciation and a housing market correction. Banks would be OK in such a scenario, but household mortgage defaults would rise significantly and the CMHC and private insurers would need a $15- to $23-billion capital injection, the report said.

While monetary tightening will be needed eventually, the IMF said this should occur gradually given economic risks and uncertainty around the neutral rate. The Bank of Canada should also be prepared to cut rates if the outlook deteriorates, it said.

Slower growth projected

The IMF projected the Canadian economy to grow by 1.5% in 2019 after a slow first quarter, down from a January projection for 1.7% growth. “Over the medium term, low productivity growth and population aging will limit potential growth to around 1.7%,” the report said.

The OECD downgraded its projection for Canadian economic growth to 1.3% this year and 2% in 2020. It projected global growth of 3.2% this year and 3.4% in 2020.

“The global economy is expected to achieve moderate but fragile growth over the coming two years,” the OECD said. “Vulnerabilities stem from trade tensions, high policy uncertainty, risks in financial markets and a slowdown in China, all of which could further curb strong and sustainable medium-term growth worldwide.”

Read the IMF report here and the OECD report here.