Canada should consider further housing-market restrictions to avoid a crash, the Organisation for Economic Cooperation and Development said, adding another voice to the recent chorus of those warning rapid price gains may be unsustainable.
The country has the highest ratio of residential investment to gross domestic product among the 34 OECD nations, and household debt equal to 168 percent of disposable income is also near the top of the group, the Paris-based group said in its annual review of the Canada’s economy published Monday.
“House prices have risen sharply, especially in Vancouver and Toronto, and housing investment is unusually high as a share of GDP, posing vulnerabilities and squeezing middle-class families,” the OECD said in its report. “Authorities have deployed some targeted macro-prudential measures, but further regionally focused measures should be considered.”
The OECD warning follows others this month from Bank of Canada Governor Stephen Poloz, executives at some of Canada’s biggest mortgage lenders and Vancouver’s mayor that a recent surge in Vancouver and Toronto markets may pose increasing risks. OECD secretary-general Angel Gurria is due to present the report Monday in Montreal, alongside Canada’s Finance Minister Bill Morneau
Morneau said last week his department is “looking very carefully at the dynamics” of the country’s housing market amid supply shortages and barriers to entry in certain cities. Housing remains “a huge issue” in Canada with stark regional divisions, and the Finance department is looking for evidence on foreign buyers to determine if restrictions are justified, he said.
Canada’s residential investment as a share of GDP, though high, “still is considerably below earlier peaks in Ireland and Spain,” the OECD report said. “Strong residential investment may in principle reflect robust demographic growth, but Canada’s outcome appears stronger than what can be justified by underlying population increases.”
Residential investment was 7.6 percent of Canada’s GDP at the end of last year. In Ireland it reached 13 percent in 2006 before a housing crash.
The OECD suggested policy makers should emulate changes New Zealand made to its mortgage-lending rules, saying new capital measures planned by the Office of the Superintendent of Financial Institutions -- Canada’s banking regulator -- may not be enough.
“Macroprudential measures should be tightened further and targeted regionally, as in New Zealand, where the authorities imposed lower ceilings on loan-to-value ratios in 2015 in the booming Auckland market and are considering further measures,” the OECD said. “Targeted measures could go beyond planned changes by OSFI to capital guidelines in regions with high house price-to-income ratios or strong house price growth to make capital requirements more responsive to market developments and risks.”
The Bank of Canada last week pointed to Vancouver price gains that have accelerated to a 30 percent year-over-year pace in May from 15 percent at the end of last year. In Toronto, the pace of price gains quickened to 15 percent from 10 percent over that period. The two cities also lead a rise in the share of new mortgages whose loan-to-income ratio exceeds 450 percent.
“Prospective home buyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction,” Governor Stephen Poloz said from Ottawa after publishing a semi-annual Financial System Review Thursday.
Prices are climbing even after Canadian authorities said in December they would raise down payment requirements for homes above C$500,000 ($392,000) while making it more costly for banks to fund lending to that market.
The OECD report also backed Morneau’s plan for deficit spending to fund infrastructure projects, saying the government has a “strong fiscal position” and the economy will benefit. “The federal government’s focus on investment in physical infrastructure, social housing, education and innovation to deliver short-term stimulus and promote longer term growth and inclusiveness is astute.”
The economy’s efficiency is also hindered by foreign ownership restrictions for airlines and telecommunications companies, and by the lack of an integrated electricity grid, the OECD report said.
Canada’s gross domestic product will expand at a 1.7 percent pace this year from 1.2 percent in 2015, and again to 2.2 percent next year, as the economy shakes off a drop in commodity prices, the OECD said. “Non-energy exports should continue to benefit from the lower Canadian dollar and get a further boost from strengthening export market growth.”