November 26, 2014 / 5:18 PM / 4 years ago

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

(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.

The 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.

The IMF estimates the housing market is overvalued nationally by between 5 and 20 percent, with a midpoint range of 10 to 12 percent, official Hamid Faruqee told a news conference.

The IMF mission saw signs of over-valuation especially in high-end single-family homes. But it 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.

One way to do this could be to lower the amortization period for uninsured mortgages, it said. (Reporting by Randall Palmer; Editing by Jeffrey Hodgson, Chizu Nomiyama and Peter Galloway)

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