The International Monetary Fund says Canadian banks and mortgage lenders should transition away from relying on the federal government to buffer the risk of a downturn in the housing market.
While the IMF says a soft landing is expected in Canadian housing, it acknowledges the housing market has regained momentum in recent months — driven mainly by “brisk activity” in Toronto, Vancouver and Calgary, and price increases in single-family homes. It noted there are “signs of overvaluation” across market segments, and regional differences remain.
“Action to further limit exposure of taxpayers to the housing market and encourage appropriate risk retention by the private sector would be desirable,” the IMF said in a statement following a recent staff visit to Canada.
The Washington, DC-based organization says it welcomes tightening measures like what the government-owned CMHC has implemented over the past year, which, it says, should limit the government’s exposure to the housing sector.
But it says more action is needed. “While CMHC’s plan to increase capital is welcome, further reduction of portfolio insurance for both CMHC and private mortgage insurers and changes to introduce more risk-sharing should also be considered.”
The IMF has come down hard on Canada in the past, describing the country’s housing market overvalued. In an October statement, it said housing in Canada was overvalued by as much as 10 per cent.
It says that the Bank of Canada’s monetary policy can afford to stay at one per cent for now (where it’s sat since 2010), but rising long-term interest rates driven by the US economy could “facilitate a needed moderation in Canada’s housing sector.”
The IMF’s position echoes Bank of Canada deputy governor Lawrence Schembri, who has said that the housing finance system in Canada is unsustainable and needs more competition. Earlier this month, Schembri published a report suggesting a transition away from government-backing and towards the competitive private sector to rebalance the market.
In the near term, the IMF suggests Canadian policy makers should implement plans to prohibit the use of government-backed insured mortgages in non-CMHC securitization programs, as well as gradually limit insurance of low-LTV mortgages to those that will be used in CMHC securitization.
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