The International Monetary Fund says Canada is exposing itself to risk by insuring mortgages through the Canada Mortgage and Housing Corporation and recommends scaling back the federal housing agency.
The advice is contained in the IMF's latest economic report card on Canada, which projects modest economic growth of 2.25% in 2013, but warns of "downside risk" from the unstable U.S. economy.
The IMF notes that Canada’s hot residential property market is a risk going forward, because household debt is so high.
Canada’s relatively robust consumer spending has powered the economy while corporate investment and exports slowed in 2013, the IMF said. But if the housing bubble pops, that could weigh on consumer confidence and hurt the economy, it added.
At the same time, the IMF noted the moderation in housing sales and new building over the past three months.
In its concern about the housing market, the IMF is echoing federal Finance Minister Jim Flaherty, who has moved several times over the last 18 months to cool house prices by demanding banks tighten mortgage rules.
In late spring, Flaherty announced CMHC would not insure mortgages of longer than 25 years, down from 30. That helped raise the monthly cost of a mortgage and could discourage some families from buying.
Flaherty has also mused about privatizing the CMHC, but that could remove from government hands the very instrument he used to cool housing sales.
Like Flaherty, the IMF is worried about the risk to taxpayers from the federal agency, which insures second mortgages for people who cannot afford a full downpayment.
In recommending that Ottawa consider winding down CMHC, the IMF said the agency "exposes the fiscal budget to financial system risks and might distort the allocation of resources in favour of mortgages and away from more productive uses of capital."
The IMF had praise for Flaherty’s policies, which were aimed at stemming off the kind of housing bubble that afflicted the U.S. and brought down U.S. housing agencies Fannie Mae and Freddie Mac.
It recommends a gradual scaling back of CMHC.
CMHC, established in 1946 to house war veterans and promote home building, evolved into a backer of mortgages in 1954, when the chartered banks first began offering mortgages. It has a mandate to ensure Canadians have affordable housing and has shouldered part of the risk of mortgages for three generations of Canadians.
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