IMF says Canada housing overvalued, urges more action if needed

Thu Feb 14, 2013 3:48pm EST
 

By Louise Egan

OTTAWA (Reuters) - Canadian housing prices were still about 10 percent overvalued at the end of 2012, the IMF said on Thursday, and it warned that authorities may have to intervene a fifth time in the mortgage market if personal debt levels rise further.

The International Monetary Fund, in its annual report on Canada, also said the country's currency was between 5 and 15 percent higher than warranted by long-term economic fundamentals, lifted in part by commodity prices and the country's safe-haven status for investors.

The Washington-based lender acknowledged that government measures since 2008 - and most recently last July - to cool overheated mortgage borrowing and house prices have helped prevent a U.S.-style housing bubble.

But residential prices and construction are both still excessive, according to its assessment based on meetings with Canadian officials from December 3-18.

"Our analysis suggests an overvaluation in real terms of about 10 percent at a national level, although with significant variations across provinces," said Roberto Cardarelli, IMF mission chief for Canada, in comments provided as a complement to the technical report.

Since the Washington-based lender conducted its study, there have been more signs of moderation in the housing market. Home prices grew at the slowest pace in three years in December year-on-year and housing starts fell more steeply than expected in January.

Like Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty, the IMF worries that highly indebted Canadians make the country more vulnerable to an external shock that could lead to job losses and bankruptcies.

While it expects a soft landing, it urged Ottawa to be ready to intervene again if the household debt-to-income ratio rises further from already record highs.   Continued...

 
Visitors are silhouetted against the logo of the International Monetary Fund at the main venue for the IMF and World Bank annual meeting in Tokyo October 10, 2012. REUTERS/Kim Kyung-Hoon