Canada should plug leaks in housing safeguards: IMF

Canada’s housing market is a bit like a century home that looks great, but always has something that needs work. In a new report, theInternational Monetary Fund is taking aim at the latest leaky faucet: recent government moves to strengthen the sector that the IMF says don’t go far enough.

Depending on whom you ask, Canada’s housing market is either a symbol of the country’s economic strength or it’s biggest vulnerability. Or maybe it’s both.

For some, a Canadian version of the 2008 U.S. housing crash has been an inevitability, and every year that house prices continue to tick higher it raises the piano that will eventually fall on our heads.

The IMF doesn’t seem to be in that camp yet, but it says cracks are starting to show. “With weaker terms of trade, lower growth, and prospects of higher U.S. interest rates, Canada’s overvalued housing market may be cooling off,” it says.

It points to signs that the ratio of listings of homes to sales are rising noticeably in Alberta, making it prudent to “keep an eye on the risk of the hard landing,” it says.

Of course, Alberta is taking it hard on the chin because of falling oil prices, which surely accounts for much of the weakness there.

The big red flag here, of course, is Canada’s historically high debt-to-income levels, which are currently floating somewhere around 164 per cent.

To someone who just signed her life away for a house in Vancouver, that may not sound like much, but averaged over the entire country, it’s a lot of debt.

Lack of oversight

The IMF also points to holes in moves Canada’s government has taken to bulletproof the housing market against a crash, such as shortening amortizations and eliminating no-down-payment insured mortgages.

What this has done, the IMF says, is fuel growth of uninsured loans, which require a 20 per cent down payment, but are ultimately more risky for the lender.

“These now comprise the bulk of mortgage originations and help fuel housing demand,” IMF says.

It also calls for Canada to streamline authority over the housing sector into one entity. The current system is a mess of oversight from the federal and provincial governments, as well as the Office of the Superintendent of Financial Institutions and the Canada Mortgage and Housing Corporation.

The IMF also recommends shifting some of the burden of insuring the sector from the taxpayer to the private lenders (CMHC, which insures the bulk of mortgages, is a crown corporation). This would encourage the banks to be more “prudent” (in other words, behave themselves instead of selling cheap mortgages to anyone with a pulse and a T4 slip).

Benjamin Tal, an economist at CIBC who doesn’t see a housing crash on the horizon, said the IMF points make sense, and agreed that the market as a whole is overshooting somewhat.

“At one point we might get an adjustment that is consistent with a soft landing,” he says.

So far, Finance Minister Joe Oliver has been less active on the housing front than his predecessor Jim Flaherty was. And the experts say the main determinant in the stability of the sector is whether people can afford their mortgages. With interest rates as low as they can go (we think?), that pendulum will eventually begin to swing the other way.