House Price Index

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.

Expected Economic Growth

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. 

Key Domestic Risk: A Sharp Correction in the Housing Market

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.

Housing Policy Recommendations

The IMF’s key housing policy messages to the Canadian government are to:

• Tighten monetary policy, but only gradually
• Continue to monitor macro-prudential policy settings ‘vigilantly’, and adjust as appropriate
• Bring in a broad set of supply-side policies to durably manage housing affordability concerns

Should housing vulnerabilities not be contained and continue to rise, the IMF recommends that the following be put in place:

• New lending by banks be subject to loan-to-income limits
• Monitoring between federal and provincial regulators to mitigate other potential and emerging risks to financial stability, such as the:
  • Increased use of home-equity lines of credit (HELOCs)
  • Rise of less regulated mortgage lending
• Improve access to beneficial ownership information and financial intelligence, in line with Canada’s recent AML/CFT assessment

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:

• All levels of government work together on complementary transportation, immigration, and housing strategies
• Emphasize and increase urban density
• Accelerate the delivery of land ready for development, such as shortening the approval process for building permits and re-zoning applications, and re-evaluating rent control policies to ensure that they do not constrain rental property supply
• Focus funding and other incentives to make sure that the right type of housing supply is being developed to meet affordability objectives (e.g. purpose-built rental housing)

Key External Risk: Trade Issues

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.

Key Policy Messages 

• Rebuild buffers – both at the provincial and federal levels - given growth above potential to reduce high levels of debt
• Rethink of corporate taxation to improve efficiency and preserve Canada’s position in a rapidly changing international tax environment
• Focus on establishing trade policies and structural reforms targeted at boosting productivity and enhancing Canada’s competitiveness