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High Home Prices a Threat to Canada says IMF; is More Tightening Needed?

19 February 2013

The International Monetary Fund, the organization that was created back in the 40s to keep exchange rate stability and improve the economy of the participating countries, has now spoken out about something all Canadians have been worried about the past couple of years – rising home prices, coupled with record high levels of household debt.

The IMF is now stating what we’ve all known for quite some time. Our home prices are too high. Our levels of household debt are too high . And, should we face another economic downturn, our housing market won’t be there to support us like it was last time. However, one tune that the IMF is singing differently than those of us here at home, is that they don’t expect home prices to drop all that much. And that would make it even more difficult for Canadians to finance a home, and take away the huge supporting role the housing market had in Canada’s last economic downturn.

“While high household debt and still elevated house prices leave Canada more vulnerable to external shocks, a less gradual unwinding of domestic imbalances than in staff forecasts could also lead to lower growth,” the IMF said in their recent statement.

Commenting on the fact that the chance of a decrease in home prices is “low” according to the IMF, they also state, “Private consumption and residential investment are expected to contribute less to growth than in the recent past.”

The fact that housing may not be there to support the economy the way it has been in the past most likely stems from the tighter mortgage rules that have been put into place – four different times in just as many years. But instead of criticizing the very thing that took away the housing market’s report, the IMF praises those rules. And in fact, says that even more might be necessary.

“Higher down payment requirements, lower caps on debt-service-to-income ratios, and tighter loan to value ratios on refinancing are some of the possible options,” they suggest.

The IMF also had great praise for our banking system, saying it’s “well capitalized, profitable, and continues to show low non-performing loans.”

But while the IMF may disagree with the forecasted decline in prices while agreeing with even tighter mortgage rules, they do agree that the Bank of Canada should not raise interest prices until better signs of growth are seen. They suggest waiting until at least the end of this year, something that’s not much of a shock to anyone and right in line with what has been expected of the Bank.

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