Canada’s Risky Housing Market Has Traded Places With The U.S., IMF Says
Posted On April 11, 2019
Canada’s housing market has grown riskier over the past two years, with risk levels similar to those seen during the financial crisis a decade ago, the International Monetary Fund (IMF) said in a report released this week.
But there is good news: The measures Canadian policymakers have taken over the past several years — particularly foreign buyers’ taxes and tough new mortgage rules — are the right ones to prevent a debt crisis, the report suggested.
In its latest Global Financial Stability Report, the Washington-based agency dedicated to global financial co-operation said the U.S. and Canadian housing markets have in essence traded places since the debt crisis a decade ago.
Watch: This office space is what passes for a one-bedroom rental in Toronto. Story continues below.
The U.S. housing market has a lower risk of crisis today, thanks to lower household debt levels and house prices that are better aligned with household incomes.
“In contrast, the housing market in Canada headed in the opposite direction, especially in such cities as Hamilton, Toronto, and Vancouver, where valuations look overstretched, much as in 2008,” the IMF report stated.
It argued many housing markets around the world are becoming less stable due to the inflow of cash from foreign buyers.
Certain types of foreign direct investment — such as when a real estate trust buys apartment buildings or a multinational construction firm sets up shop — can make housing markets more stable, the report said.
But money from foreigners buying individual homes “seem(s) to be associated with higher house prices in the short term and more downside risks to house prices in the medium term in advanced economies,” the report said.
Perhaps surprisingly, the IMF’s research showed that foreign money has done more to destabilize the Toronto and Calgary housing markets than Vancouver’s market, which is generally thought of as being the most influenced by foreign money.
In Calgary’s case, money linked to the boom-and-bust cycles of Alberta’s oil industry seems to be involved.
The foreign buyers’ taxes provincial governments introduced for the Toronto and Vancouver areas “might alleviate overvaluation pressure in these housing markets and reduce downside risks,” the IMF report said.
But the fact that different markets react differently to foreign buyers’ taxes suggests that “their broader impact may be limited,” the report added.
Another way to reduce risk in a housing market is through “macroprudential measures,” the IMF said, such as reducing how much homebuyers can borrow relative to their income.
That is what Canada’s banking regulator, OSFI, did when it introduced a mortgage stress test that requires borrowers, in effect, to qualify for a mortgage at a rate that is two percentage points higher than the one they are being offered. The test reduced the maximum amount homebuyers can borrow by around 20 per cent.
Industry wants looser rules
That stress test has seemingly become the bane of the Canadian residential real estate industry’s existence, with numerous industry groups and real estate boards calling on the government to loosen or eliminate it.
They argue the stress test has shut out many would-be buyers from the housing market.
Some in the industry have also called for the government to increase amortizations on insured mortgages to 30 years, from 25 years.
But other market observers have said those moves would do little to alleviate the country’s housing affordability crisis, and would instead push house prices up.
CMHC takes a piece of the action
The federal government didn’t grant the industry’s wishes in its latest budget, tabled in March.
Instead, it focused on a new “First Time Home Buyers Incentive” program that would see Canada’s government-run mortgage insurer, the CMHC, buy a stake in homebuyers’ homes, eventually recovering its money when the home is sold. This would reduce the buyer’s monthly mortgage payments.
Because the program effectively caps the maximum mortgage amount at $480,000, analysts say it will have only a limited impact on the priciest markets, Toronto and Vancouver.
And because the program launches this fall, it could slow the housing market until then, as buyers sit on the sidelines until government help is available, economists at RBC suggested.
The CMHC says the program will have only a very small impact on house prices, pushing them up by a fraction of a percentage point.
But “by helping first-time home buyers purchase homes, we will free up rental supply, easing pressure on rents,” the corporation said in a statement.
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