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Briefing highlights

  • OECD urges more housing measures
  • Rent control may hurt poor, young: OECD
  • Group sees brighter economic outlook
  • Markets at a glance
  • Santander rescues Banco Popular

OECD warns on housing

The OECD is pressing Canada to go beyond the many measures already taken to cool overheated housing markets.

It also warned that Ontario’s recent rent control expansion threatens to dampen rental options, hurting poor and young people.

The call for further housing measures by the Organization for Economic Co-operation and Development, part of a global economic outlook released Wednesday, comes on the heels of a similar recommendation from the International Monetary Fund last week.

It also follows a downgrade of Canada’s major banks by Moody’s Investor Service, which, like other observers, cited record consumer debt levels and inflated home prices.

Concerns focus on Vancouver and Toronto, despite moves taken by the B.C. and Ontario governments and at the federal level to tame those markets.

“Raising interest rates will reduce overheating in housing markets, which poses economic and financial stability risks and has made housing increasingly unaffordable, especially in Toronto and Vancouver,” the OECD said, projecting that the Bank of Canada will move on rates later this year and that home price growth in those two cities will slow.

Still, the group added, “greater use should be made of macroprudential policies, particularly tools such as debt-to-income constraints under which a national rule is more restrictive in regions where house prices are inflated relative to fundamentals.”

It cited the measures already taken by B.C. and Ontario, notably the tax on foreign buyers of Vancouver-area properties and a similar levy on speculative purchases aimed at cooling down markets in and around Toronto.

“Some short-term reprieve in house price growth is likely, but speculation-fueled price increases may resume and the expansion of rent control risks discouraging the supply of new rental housing,” the OECD said of the Ontario measures.

“Low rental supply would hamper labour mobility – particularly for the poor and the young – which will make adjustment to globalization more costly and prolonged.”

The OECD is not alone in suggesting Ontario’s move to hose down Toronto may amount to little more than instant gratification.

True, Toronto home sales tumbled in May and prices eased as listings surged, as The Globe and Mail’s Janet McFarland reported this week, but some analysts suggest the impact may be temporary.

That certainly appears to be the case in Vancouver, which is rebounding from its short slump.

“Overheating concerns in Vancouver are about to enter the housing conversation again,” warned Royal Bank of Canada senior economist Robert Hogue.

Not only that, some economists believe the Bank of Canada won’t start raising rates until 2018, rather than this year, as the OECD forecast.

Still, other observers are more hopeful that the cooling in the Greater Toronto Area may have more staying power than the easing in the Greater Vancouver Area.

“While early yet, a key difference between current patterns in the GTA and last year’s GVA experience is the jump in resale supply in the former market,” Toronto-Dominion Bank economists Michael Dolega and Diana Petramala said in a report Tuesday.

“While most measures still point to balanced market conditions in the Toronto region as of May, the additional supply on the market is likely to contribute to a slowdown in home price growth going forward,” they added.

“As such, the deceleration in home price growth is likely to be more broad in the GTA than has been the case in the GVA.”

They also projected a 40-basis-point rise in the yield on the five-year government bond later this year, which would lead mortgage rates higher.

Despite all of this, though, Mr. Dolega and Ms. Petramala still projected that home sales in Toronto will hold above their five-year average, while average prices ease only modestly.

“The corollary is that a significant degree of overvaluation in the GTA market is likely to persist over the medium term.”

Brighter outlook

The OECD has more than just a gloomy housing message for Canada: It also painted a brighter overall outlook, noting that central bank and federal government policies are adding juice to the economy.

“Economic growth is projected to increase in 2017, driven by expansionary fiscal policy, household wealth gains and a resumption in business investment, in particular in the resource sector following the rebound in commodity prices,” the group said.

“In 2018, growth is likely to ease but remain robust, as government spending increases taper off.”

The OECD also cited improvements in the jobs market, and projected a gradual rise in exports.

“Growth is set to shift from private consumption, housing investment and government spending toward business investment and exports,” it said.

“Very recent increases in consumption are unsustainable as they have not been matched by increases in income or output.”

There are, of course, potential troubles, notably in trade with a newly protectionist U.S., where Canada is concerned.

“Recent increases in federal investment in physical infrastructure, social housing, education and innovation will improve Canada’s capacity to adjust to globalization in an inclusive and efficient way,” the OECD said.

“Adjustment pressures would be exacerbated in affected industries if the shift toward more protectionist trade policy in the United States continues.”

The OECD took pains in the broader report to stress the benefits of global trade flows, warning the “backlash against international trade has been rising and political support for more protectionism has gained popularity in OECD countries, despite a marked lull in the pace of trade integration since the crisis.”

It also projected global economic growth of 3.5 per cent this year, and 3.6 per cent next.

Markets at a glance

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