IMF warns over Canada’s ‘overheated housing market’ — again

The government has moved several times in recent years to tighten mortgage lending rules, including reducing the maximum amortization period for insured mortgages as well as making changes to the qualifying rules. The Canadian Press

Another major international organization is warning Canadians about the state of our housing market – again – with the International Monetary Fund suggesting home prices in Canada are “overvalued” by as much as 20 per cent.

We’ve heard these warnings before, but the latest comes as debt levels are again accelerating after moderating for a brief spell. New numbers out later this week are likely to show households taking on more debt at a faster pace, experts say.

The IMF suggested on Monday reforms made by Ottawa to tighten mortgage lending standards in recent years have been too weak, allowing home prices to continue to far outstrip income growth in places like Toronto and Vancouver.

Capping home loans to 25 years (down from 40-year amortization periods before the recession), higher down-payments and stripping government-backed insurance for loans that exceed $1 million are some measures the Department of Finance and the federal housing agency have implemented in recent years to curb riskier lending.

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But: “These steps may have been only partially effective in restraining credit growth,” the IMF said.

MORE: Sturdy as a house of cards? A look at Canada’s property boom

The IMF said in January Canadian home price could be overvalued by between seven and 20 per cent – an estimate that followed the Bank of Canada’s assessment a month earlier suggesting prices are overvalued by between 10 and 30 per cent.

High household debt levels and Canada’s “overheated housing market” are two risks the IMF said “we need to keep an eye on.”

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Accelerating debt

Canadian household debt as percentage of income sits at nearly 163 per cent, meaning for every dollar in income generated by Canadian workers, we collectively owe just under $1.63 – a record high. And debt growth is accelerating again.

“Following a sustained period of stable year-over-year increases, mortgage growth accelerated for the third consecutive month in January,” RBC economists said in a research note last week. Total outstanding home loans grew by 5.4 per cent from the year-ago level to mark the fastest rate of growth since November 2013, RBC said.

Numbers from Statistics Canada out Thursday are expected to back up RBC’s observation and show debt levels rising for consumers across the board. “The national balance sheet accounts are likely to show deteriorating debt ratios,” Bank of Montreal economists said.

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A bubble?

Falling prices for oil and other commodities are serving to put a chill on housing activity in resource-dependent regions, like Alberta, where prices are now declining and listings have surged. But the major hubs still driving the boom – Vancouver and Toronto – are showing little sign of slowing down.

Sales in the Greater Toronto Area shot up 11 per cent last month while benchmark prices climbed 7.8 per cent – in one of the coldest Februarys on record. The average price of a detached home in Toronto blew past $1 million last month.

‘Is it a bubble? It’s hard to say given that demand reflects more strong fundamentals than rampant speculation. But something’s not right.’

In Vancouver, meanwhile, sales popped 21 per cent and prices rose 6.4 per cent – in a market that’s already the second-priciest in the world, trailing only Hong Kong.

“Demand in these two cities has been fuelled by wealthy, highly-skilled international migrants; repeat buyers selling inflated homes and taking on larger mortgages,” BMO economist Sal Guatieri said last week.

“Is it a bubble? It’s hard to say given that demand reflects more strong fundamentals than rampant speculation. But something’s not right. For most goods, high prices discourage demand. But in these two cities, first-time buyers are fearful of getting shut out of the market. So they keep buying despite worsening affordability, a trend last seen in the late 1980s (and that did not end well),” Guatieri said in note from Friday.

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Further action

The IMF said the lull in debt growth experienced through most of 2013 was a “direct result of tighter lending standards” implemented under former Finance Minister Jim Flaherty.

“If financial risks start rising again, policymakers may need to take further action,” the IMF report said.

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