IMF says Canada may need to tighten mortgage rules further

Wed Nov 26, 2014 10:30am EST
 
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OTTAWA Nov 26 (Reuters) - Canada's housing market is likely to achieve a soft landing but authorities may need to tighten mortgage rules further to contain vulnerabilities to a crash, the International Monetary Fund (IMF) said on Wednesday.

Officials with the international agency said the Bank of Canada can afford to keep its monetary policy accommodative for now, until signs emerge of a more balanced and durable recovery with stronger business investment.

On Tuesday the Organization for Economic Cooperation and Development predicted the central bank would need to start hiking rates in May.

"The balance of risks is modestly tilted to the downside for the Canadian economy," the IMF said, pointing to the possibility of faster-than-expected tightening of global financial conditions and a further fall in oil prices.

"Deeper downside risks to growth involve a combination of external shocks that are amplified by high household balance sheet vulnerabilities and a sharper-than-expected correction in house prices."

Canada avoided the housing market crash that accompanied the financial crisis in the United States. But a post-recession housing boom, fueled by record-low borrowing costs, has prompted some analysts to warn a bubble may be in the works.

Canada's Conservative government has tightened eligibility for government-backed mortgage insurance several times, hoping to push more marginal buyers out of the market and cool the market.

The federal government provides mortgage insurance through Canada Mortgage and Housing Corp (CMHC) to qualified home buyers who make a down payment of less than 20 percent. The IMF encouraged policymakers to limit the government's exposure to the housing market through this kind of support.

It saw signs of over valuation in single-family homes, especially associated with high-end buyers, but said tighter mortgage insurance rules, reduced affordability and the construction of multi-family units appeared to have contained price growth in other market segments.

"Further action may be needed if household balance sheet and housing market vulnerabilities resume rising," it said.

Stress tests suggest Canada's banks are resilient to credit and contagion risks due to their strong capital position and other factors, the IMF said. But it added banks' increasing exposure to capital markets and risks from foreign operations warrant close attention. (Reporting by Randall Palmer; Editing by Jeffrey Hodgson and Chizu Nomiyama)