* Housing overvalued by 10 pct, signs of overbuilding
* Household debt also a concern; more gov't measures may be
* Sees Bank of Canada rate hike in late 2013
* Says federal budget set for balance; provincial finances
By Louise Egan
OTTAWA, Feb 14 Canadian housing prices were
still about 10 percent overvalued at the end of 2012, the IMF
said on Thursday, and it warned that authorities may have to
intervene a fifth time in the mortgage market if personal debt
levels rise further.
The International Monetary Fund, in its annual report on
Canada, also said the country's currency was between 5 and 15
percent higher than warranted by long-term economic
fundamentals, lifted in part by commodity prices and the
country's safe-haven status for investors.
The Washington-based lender acknowledged that government
measures since 2008 - and most recently last July - to cool
overheated mortgage borrowing and house prices have helped
prevent a U.S.-style housing bubble.
But residential prices and construction are both still
excessive, according to its assessment based on meetings with
Canadian officials from Dec. 3-18.
"Our analysis suggests an overvaluation in real terms of
about 10 percent at a national level, although with significant
variations across provinces," said Roberto Cardarelli, IMF
mission chief for Canada, in comments provided as a complement
to the technical report.
Since the Washington-based lender conducted its study, there
have been more signs of moderation in the housing market. Home
prices grew at the slowest pace in three years in December
year-on-year and housing starts fell more steeply than expected
Like Bank of Canada Governor Mark Carney and Finance
Minister Jim Flaherty, the IMF worries that highly indebted
Canadians make the country more vulnerable to an external shock
that could lead to job losses and bankruptcies.
While it expects a soft landing, it urged Ottawa to be ready
to intervene again if the household debt-to-income ratio rises
further from already record highs.
"These measures could include higher down-payment
requirements, lower caps on debt-service-to-income ratios, and
tighter loan-to-value ratios on refinancing," it suggested.
The central bank, for its part, should not use interest rate
hikes to curb household borrowing except as a very last resort,
the IMF said. It urged the Bank of Canada to keep its benchmark
rate on hold at 1.0 percent until growth regains momentum, which
it expects in late 2013.
The IMF report's outlook is broadly in line with that of the
government and central bank, which see growth picking up in the
second half of this year after a weaker-than-expected 2012.
STRONG CURRENCY HURTS MANUFACTURING
Wading into a controversial domestic debate, the report
states that the sharp appreciation of the Canadian dollar and
increased competition from China as a trade competitor
"contributed to the decline of Canada's manufacturing market
share in the United States over the last decade."
It noted that the Canadian authorities "only partially
agreed" with this view, saying the decline of manufacturing was
a trend among all advanced economies. The main opposition party,
the New Democrats, has clashed with the ruling Conservatives on
this issue, contending that the strong currency, which it says
is caused by heavy reliance on oil sands development, has
hammered manufacturing jobs.
The federal government is on track to balance its budget by
2015-16, but the fiscal outlook for some of the largest
provinces such as Ontario and Quebec is less certain, the IMF
said. A priority in the medium term will be to contain
healthcare costs, a provincial responsibility, it said.
The IMF urged the federal government to consider two new
approaches to fiscal planning, but policy makers appeared
reluctant to agree, according to the report.
First, it suggested Ottawa publish a "fiscal sustainability
report" every 3-5 years which would review progress by each
level of government - federal, provincial, territorial and
municipal on managing debt and deficits.
Secondly, a variety of measures could be adopted to soften
the impact of volatile prices for oil and other commodities on
the economy and on government budgets. For example, the
government could put aside savings during commodity booms for
use in leaner times, and exclude commodities from some of its
fiscal indicators to produce more accurate projections.