Canadian housing market Photo: Michael Muraz/Flickr

The Canadian housing market, like a number of others in developed nations, is overvalued and a threat to the global economy, says the International Monetary Fund (IMF).

In a report released Wednesday, the IMF singled out Canada for its staggering house price-to-income and house price-to-rent ratios, which, according to the fund, are the second highest and highest in the world respectively.

House price-to-income ratio


House price-to-rent ratio


As the charts show, the IMF believes home values in Canada are 33 per cent above their historical average when compared to incomes and 87 per cent above their historical average when compared with rents. But Canada isn’t alone in its overvaluation. The IMF says house prices are well above historical averages in countries such as New Zealand, Norway, Belgium, Australia, France and the United Kingdom.

“Housing booms have different characteristics across countries and time periods,” IMF deputy director Min Zhu states in the report. “What is common is that when the bust comes, it very often damages financial stability and the real economy.”

The solution? Put an end to unsustainable borrowing. For their part, the IMF launched on Wednesday the “Global Housing Watch,” which tracks housing data so that regulators and policymakers across the globe can learn from it.

Group urges government to rethink lending practices

Of course, the IMF is not the only group to warn of a potential housing bubble. The Organization for Economic Co-operation and Development (OECD) on Tuesday said Canada’s overheated housing market is at risk of a serious correction.

In their report, the global think tank urged the federal government to rethink the way it insures borrowing in the real estate market through the Canada Mortgage and Housing Corporation (CMHC). From the National Post:

Insurance provided by [the CMHC] is currently fully backed by Ottawa for those loans that come without at least a 20 per cent down payment by the buyer.

Also, the Ottawa-based agency can now insure mortgages up to a limit of $600-billion. The OECD suggests that ceiling could gradually be lowered and the private-sector contribution raised to $300-billion.

Still, the organization doesn’t expect a “generalized crash in house prices” because, according to OECD secretary general Angel Gurria, “the quality of mortgage loans remains high [in Canada], and macro-prudential regulation has significantly slowed credit growth.”

Does the market still have legs?

There certainly seems to be agreement among experts that housing activity will slow, but many say the market has not yet reached its peak.

According to the consensus of a Reuters poll which surveyed 25 market forecasters, Canadian house prices are expected to rise three per cent in 2014, one per cent in 2015 and 1.5 per cent in 2016.

Another report from the Bank of Montreal supports the theory that the market isn’t about to stagnate or crash anytime soon. According to economist Robert Kavcic, “echo boomers,” the children of baby boomers, may be poised to buy their parents’ detached homes when the boomers finally start retiring and downsizing. From the National Post:

Even though there are about 10 million Canadian baby boomers aged 49-67, they are actually outnumbered by those aged 20-38.

“While fertility rates among boomers were lower than for their parents, leaving fewer kids, immigration, which is highly concentrated in this age group, has fully filled the gap,” wrote the economist, noting the group is now moving through its prime first-time home buying years.

But this won’t stop a market slowdown, Kavcic says, rather just delay it to 2018:

“From a strictly demographic perspective, that would place us around the 7th inning of the secular bull market in Canadian housing, before conditions become unfavourable around the turn of the decade,” wrote Kavcic.

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