Though Canada may have weathered the 2008 recession better than its neighbour to the south, the International Monetary Fund (IMF) warns Canada shouldn’t rest on its laurels. The organization believes the country’s financial system could be doing more to protect against the economy’s two main weaknesses: the “overheated” housing markets and high household debt levels.
Canada currently has one of the highest debt-to-income ratios among countries belonging to the Organization for Economic Cooperation and Development (OECD) with debt levels reaching over 150 per cent of disposable income. House prices across the country have surged more than 60 per cent nation-wide since 2000, with Toronto, Calgary and Vancouver seeing significant acceleration.
As the country’s economy is shaken by declining oil prices and home listings rise in the Prairies, the IMF noted it “will need to keep an eye on the risk of a hard landing” in oil-rich Alberta.
While Canada introduced tighter mortgage rules in recent years, the IMF says the tightened lending standards have been “only partially effective in restraining credit growth.” Once gain, the organization said the government could be doing more to reduce taxpayers’ exposure to housing market risks.
One key problem? The IMF is troubled by the prevalence of uninsured mortgages.
“These loans with loan-to-value ratio below 80 per cent are not subject to the same regulatory tightening. These now comprise the bulk of mortgage originations and help fuel housing demand,” said the IMF, in a blog post by Hamid Faruqee and Andrea Pescatori.
“For example, house price increases concentrated in single-family homes in fast-growing real estate markets seem tied to uninsured mortgages. If financial risks start rising again, policymakers may need to take further action to tighten rules on these loans.”
In its January 2015 report on the Canadian economy, the IMF said Canada should consider tightening amortization periods and lower loan-to-value limits of uninsured mortgages to help cool off overheated markets. It also proposed putting caps on debt-service-to-income ratios to help deal with the the issue of borrowed down payments.
Canada could shore up against future vulnerabilities through grander oversight, with the organization noting while “informal cooperation between key agencies worked well during the crisis, future shocks will inevitably look different.”
Having a body that could provide macroprudential oversight of the financial system would help the installing of “more formal arrangements already in place to identify and respond to future shocks would enhance resilience.” Such a body, would also help in collecting better housing data, something the CIBC, as well as other Canadian real estate watchers have identified as a key need.