* Housing overvalued by 10 pct, signs of overbuilding
* Jury still out on whether further mortgage tightening
* Sees Bank of Canada rate hike in late 2013
By Louise Egan
OTTAWA, Feb 14 Canadian housing prices were
about 10 percent overvalued at the end of 2012 despite
government efforts to rein in the market, 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 do not
The International Monetary Fund, in its annual report on
Canada, also said Canadian dollar was between 5 and 15 percent
higher than warranted by long-term economic fundamentals.
Although government measures since 2008 to cool overheated
mortgage borrowing and house prices have helped prevent a
U.S.-style housing bubble, residential prices and construction
are both still excessive, the IMF said, based on its meetings
with Canadian officials from Dec. 3-18.
"The jury is still out on whether this is going to take care
of the problem," Roberto Cardarelli, IMF mission chief for
Canada, told reporters in Ottawa after releasing the report.
Since the IMF 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 in January.
The high indebtedness increases Canada's vulnerability to an
external shock because people cannot borrow their way out of a
crisis if they are already maxed out, Cardarelli said.
In the IMF's soft landing scenario, a housing slowdown,
including a cumulative 11.5 percent drop in prices over the next
five years, would subtract 0.4 percentage point from gross
domestic product yearly.
It urged Ottawa to be ready to intervene again if there is a
sustained increase in the household debt-to-income ratio from
the record high 164.4 percent in the third quarter of 2012.
"These measures could include higher down-payment
requirements, lower caps on debt service-to-income ratios, and
tighter loan-to-value ratios on refinancing," the IMF said.
It said the Bank of Canada should not use interest rate
hikes to curb household borrowing except as a last resort, and
it urged the central bank to keep its benchmark rate on hold at
1.0 percent until growth regains momentum, which it expects in
The IMF forecast 1.8 percent economic growth in 2013
following a sluggish spell late last year, broadly in line with
that of the government and central bank. It sees growth picking
up in the second half of this year as the United States,
Canada's top trade partner, recovers.
Growth could be weaker if there is a downturn in the United
States or Europe, or if commodity prices slide further.
STRONG CURRENCY HURTS MANUFACTURING
Wading into a controversial domestic debate, the report said
the sharp appreciation of the Canadian dollar and increased
competition from China "contributed to the decline of Canada's
manufacturing market share in the United States over the last
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, arguing that the strong currency has hammered
The IMF said 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. 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, the report said.
It suggested Ottawa publish a "fiscal sustainability report"
every three to five years that would review progress by each
level of government - federal, provincial, territorial and
municipal on managing debt and deficits.
And 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.