In a new report from the International Monetary Fund (IMF), the Washington, DC-based group says the Canadian housing market is overvalued by about 10 per cent — an assessment that aligns with the latest report on home prices from TD Economics.
But despite the overvaluation, the IMF said it expects the Bank of Canada to wait until early next year to hike interest rates. As the Wall Street Journal reports:
The IMF said low inflation in Canada, a moderating in the housing market and the downside risks means the Bank of Canada can wait to hike rates until early 2015. The projected increase in long-term rates as the Fed exits bond-buying also gives the Canadian bank more room to wait on rate hikes. But it said record-high household debt and overvalued house prices leave less room for cuts.
Delaying the rate hike until 2015 was something the Organization for Economic Cooperation and Development (OECD) cautioned against back in November 2013. They said the famously low one per cent prime lending rate should be raised in the last three months of 2014 and then continue to rise gradually to 2.25 per cent by the end of 2015.
Still, one thing the OECD report and the IMF report seem to agree on is that Canada’s economy will grow this year — by 2.25 per cent, according to IMF.
Besides hiking the rate next year, the IMF report also said the Canadian government should look at increasing the market share of private mortgage insurers, in order to reduce exposure to housing sector risks.