UPDATE 1-IMF says Canada may need to tighten mortgage rules further

Wed Nov 26, 2014 12:17pm EST
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(Adds estimate of housing over-valuation, possible target for tightening rules, paragraphs 9-10, 12)

By Randall Palmer

OTTAWA Nov 26 (Reuters) - Canada's housing market is likely to achieve a soft landing but authorities may need to tighten mortgage rules more than they have already to make it less vulnerable to a crash, the International Monetary Fund (IMF) said on Wednesday.

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

On Tuesday, the Organization for Economic Cooperation and Development said the central bank would need to start hiking interest 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. Canada is a major oil exporter.

"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.

The Conservative federal government has tightened eligibility for government-backed mortgage insurance several times to cool things down, hoping to push more marginal buyers out of the market.   Continued...