The International Monetary Fund is raising red flags about Canada's housing market, warning that moves by Ottawa in recent years to tighten mortgage lending standards and boost oversight of the country's financial system haven't gone far enough.
Household debt levels remain well above those in other Western countries, the organization said in a commentary posted to its website Monday. Home prices have jumped 60 per cent in the past 15 years and remain overvalued from 7 per cent to 20 per cent, in line for a "soft landing" over the next few years, the IMF said.
At the same time, it reiterated its call for Canada to collect more data on its housing market and to centralize oversight of the financial sector. As it stands, regulation remains fractured among the Department of Finance, the Office of the Superintendent of Financial Institutions, the Canada Mortgage and Housing Corporation and provincial governments all playing separate roles in regulating the housing the market.
Regulatory leaders meet regularly as part of Ottawa's Senior Advisory Committee, but that is an informal body the IMF says should become more formalized.
"Providing a mandate for macro-prudential oversight of the financial system as a whole to a single entity would strengthen accountability and reinforce policy makers' ability to identify and respond to future potential crises," wrote IMF officials Hamid Faruqee and Andrea Pescatori.
"Such a body should have participation broad enough to 'connect the dots' and form a complete and integrated view of systemic risks with powers to collect the required data."
While the growth of mortgage insurance has slowed as a direct result of Ottawa's push to tighten lending rules, the international organization renewed its calls for CMHC to implement a deductible on its mortgage insurance program that would help cool the market even further.
"Limiting the federal backstop would increase private sector risk sharing and can further encourage prudence," they wrote, adding the changes would need to be gradual.
CMHC has studied the issue of a mortgage insurance deductible as part of its plans to reduce its role in the Canadian housing market and share the risk with private sector lenders, but hasn't made any moves to implement such a policy. Private insurers such as Genworth Financial Canada and Canada Guaranty Mortgage Insurance Co. essentially have a deductible given that Ottawa only guarantees up to 90 per cent of their portfolios of mortgage insurance, a limit that could be extended to CMHC.
"The concept of risk-sharing has its merits and is an idea that could be considered," the agency said in an e-mailed statement. "CMHC's role is to act as an adviser to the government and this is a policy consideration that falls under the oversight of the Government of Canada, via the Department of Finance and it is ultimately their decision to make."
A deductible would have major consequences for the country's monoline lenders, financial institutions that lend to home buyers but don't take deposits, said Jim Murphy, chief executive officers of the Canadian Association of Accredited Mortgage Professionals. Such lenders, who make up about a third of new mortgages in the country, rely heavily on the ability to sell their loans into mortgage-backed securities, which typically requires mortgages to be insured.
"If you don't have a 100-per-cent guarantee, how would that be priced [into the lenders' mortgage securities]?" he asked. "There are some important questions that have to be answered first in terms of how something like that might work."
The Canadian Bankers Association said it hasn't taken a position on a CMHC deductible, calling the idea "speculation."
The IMF also warned that rules to slow the growth of insured mortgages have fuelled a boom in uninsured mortgages among buyers able to afford a 20 per cent down payment. Uninsured buyers now make up two-thirds of new mortgages. Such buyers are particularly active in the country's most expensive housing markets, the IMF said, raising concerns that some buyers might be borrowing to help finance their down payments.
"With some of this new lending, particularly by smaller and less regulated financial institutions, going to non-prime borrowers, it may partly reflect greater use of borrowed funds for larger down payments to avoid insurance premiums," the IMF authors wrote.
Exactly how many buyers are borrowing for their down payments is unknown, although the IMF urged regulators to start collecting such data. Uninsured buyers are considered more secure because they have more equity in their homes, but they still pose a risk to taxpayers given many lenders take out CMHC bulk insurance on their portfolios of uninsured mortgages in order to package them into mortgage-backed securities.