Canada should take regional approach to address housing problems: IMF chief

TheGlobeandMail.com
Sept. 13, 2016
By Bill Curry

The head of the International Monetary Fund says any government moves to tackle Canada’s housing market should be targeted at specific regions like Toronto and Vancouver, rather than imposed nationally.

Speaking on Parliament Hill after a meeting with Prime Minister Justin Trudeau, IMF managing director Christine Lagarde said it is clear from her organization’s research that Canada’s housing market has strong regional differences.

“That calls for, clearly, very, very specific policies,” she said when asked for her assessment of the Canadian housing market and concerns about over-heating housing prices in Toronto and Vancouver. “I would suggest that macroprudential measures by the banks under the authority of the central bank is certainly one good avenue to explore in order to keep control over the housing markets and avoid excesses.”

Macroprudential measures essentially refer to policies such as mortgage rules requiring minimum down payments. The term excludes changes to interest rates. Economists interpreted Ms. Lagarde’s comments as a cautious message that policy makers should look at measures such as tightening lending standards on mortgages for homes priced above a certain level rather than a national response such as raising interest rates in an effort to cool the residential real estate market.

Ms. Lagarde’s comments come as governments of all levels struggle with how to respond to steep price increases in some urban markets. Historically low interest rates are a key factor driving prices, but efforts are also under way to better understand the impact of foreign capital entering the Canadian housing market as a form of short-term investment that means some homes and condos sit empty even in places where demand for housing is high.

“Lagarde is saying that if there are risks associated with an excessive run-up in house prices and related debt burdens, they are specific to certain cities in Canada. She says that the solution should therefore be targeted at those locations, rather than a broader tool like a general rise in interest rates,” CIBC chief economist Avery Shenfeld said.

Bank of Montreal chief economist Doug Porter said Ms. Lagarde’s comments were worded carefully, but suggest that growth is too weak at the moment for an increase in rates in response to housing concerns.

“She is recognizing openly that traditional measures to cool housing - i.e. interest rate hikes - are really not an option at this point,” he said. “It sounds very much like she is suggesting that lending standards could be tightened, under the broad guidance of the central bank.”

The Canada Revenue Agency announced this week that it has launched a review into the actions of real estate speculators in British Columbia as a result of a Globe and Mail report that uncovered possible tax evasion and fraud.

Mr. Trudeau said on Tuesday that Ottawa is working with provinces and municipalities on possible further measures, and referred to his government’s efforts to fight tax evasion by giving the CRA an additional $444-million in this year’s budget.

“One of the challenges people are facing in markets like Vancouver and Toronto is increasing home prices, and what we are looking at - in partnership with the provinces and the municipalities - are ways to ensure that Canadians are able to afford their homes,” he said. “One of the issues that we’ve highlighted recently is the need for continued enforcement of the tax code [to] make sure that we’re cracking down on people who are avoiding paying their fair share of taxes.”

Ms. Lagarde’s visit to Parliament Hill followed a morning speech in Toronto to the C.D. Howe Institute, where she stressed her organization’s repeated call for more inclusive global growth.

Later in Ottawa, she praised the Trudeau government’s economic policies as an example of the approach the IMF is recommending for governments globally.

She also expressed hope that the “very reasonable” Comprehensive Economic and Trade Agreement between Canada and the European Union will soon be finalized.

“I really very much hope that Canadian economic policies can actually go viral and that this energy and this passion for openness can be sufficiently contaminating, including in the European Union,” she said.