The IMF's Canadian Housing Policy Recommendations
by Yvonne von Jena | June 5, 2018
According to the latest outlook from the International Monetary Fund (IMF), Canada's economy is facing "significant risks" including the risk of a sharp correction in the housing market. The IMF also provides various policy recommendations for mitigating this domestic housing risk, including continued tightening of monetary policy, focus on supply-side policies and loan-to-income limits.
Although the economy has continued to perform well in 2017, growth was robust with Canadian real GDP expanding by 3% in 2017, which is the highest growth rate among G7 economies in the year. The IMF expects growth to moderate to more sustainable levels as the impact of monetary and macro-prudential policy tightening takes effect. As a result, the IMF projects real GDP to slow to 2.1% in 2018 and to 2.0% in 2019. The IMF’s outlook is subject to significant risks, both domestic and external.
The IMF says that the housing market, which has been “a key domestic vulnerability”, has moderated somewhat and is “finally showing signs of cooling down” in response to several rounds of macro-prudential measures and monetary tightening.
However, the IMF still believes that a sharp correction in the housing market continues to be a key domestic risk. This risk could be triggered by a sudden shift in price expectations or a faster-than-expected increase in mortgage interest rates. Further, the IMF notes that, “while the banking system is profitable, it is heavily exposed to household and corporate debt.” Given this, risks to financial stability and growth could emerge if the house price correction is accompanied by a rise in unemployment and sharp contraction in private consumption.
The IMF’s key housing policy messages to the Canadian government are to:
Should housing vulnerabilities not be contained and continue to rise, the IMF recommends that the following be put in place:
With regards to addressing housing supply issues, particularly in the areas around Toronto and Vancouver, the IMF recommends that policies be put in place that require:
The IMF believes that external risks are more acute than in the recent past and relate to the impact of policy changes in the U.S. and NAFTA. Other risks include structurally weaker growth in key advanced economies, a sharp slowdown in China, and tighter global financial conditions triggered by an abrupt change in global risk appetite.