High housing costs boost inequality, OECD tells Canada

The OECD says Canada’s urban housing markets are overvalued, making owning a home too difficult for many Canadians and increasing inequality.

Forum praises Canada's economy, but highlights uneven growth and poor skills training

Unfinished homes sit empty on an abandoned housing development in Ireland. The OECD is warning Canada on its hot housing market. (Bloomberg)

The OECD says Canada’s urban housing markets are overvalued, making owning a home too difficult for many Canadians and increasing inequality.

In the first major survey of the Canadian economy in two years, the Organization for Economic Co-Operation and Development takes particular aim at risks in the housing market, while also chiding the country's environmental record, the oilsands and skills training.

Almost 40 per cent of the country's population lives in a city where house prices are seriously or severely unaffordable- OECD

The report — which contains a dedication to the late finance minister Jim Flaherty from the group's secretary general, Angel Gurria — is mostly complimentary about the state of the Canadian economy which it says is doing relatively well with expected growth rates of 2.5 per cent this year and 2.7 per cent in 2015.

But it criticizes Canada for the increasing unaffordability of housing in big cities like Vancouver, Toronto and Calgary, saying high household debt leaves families vulnerable to interest rate hikes.

"Almost 40 per cent of the country's population lives in a city where house prices are seriously or severely unaffordable," it states. "A shock to even one segment could have spillover effects to the broader economy if banks respond by tightening credit significantly or if negative wealth effects depress consumption."

Recommends limiting CMHC mortgages

Given such risks, the OECD wonders why the government allows Canada Mortgage and Housing Corp. to insure 100 per cent of high-leverage mortgages when most other countries limit potential losses to 10 to 30 per cent of outstanding balances.

"Imposing a deductible on mortgage insurance, as is common in other lines of insurance, would help promote stability by better aligning the interests of the lenders and those of the insurer, thereby reducing moral hazard," it recommends.

"Over the longer run. the insurance activities of CMHC could be privatized, shifting the government's role to one of guaranteeing only against catastrophic losses," it added.

Speaking to reporters at International Economic Forum of the Americas in Montreal, Gurria said he wasn't overly worried about a housing market crash in Canada.

"The concern more than a crash is about affordability," he said.

Finance Minister Joe Oliver has come under pressure to intervene in the market after recent moves by Canadian banks that have taken five-year fixed rates below three per cent. But, speaking in New York, the minister downplayed the danger saying rates had not come down very much.

"We don't believe there is a major problem," he said.

Two-speed economy

The OECD warns that inequality is rising in Canada and that it is increasingly becoming a two-speed economy, as Bank of Canada governor Stephen Poloz has described it, with resource-rich regions doing well at the expense of other regions.

"The emergence of low-cost competitors in emerging economies and exchange-rate appreciation resulted in slower growth in the manufacturing-based economies of Ontario and Quebec," it said.

The OECD report also expresses concern over the lack of skilled workers for some sectors in some regions, particularly resource-rich Alberta and Saskatchewan.

In a separate paper, the OECD says federal and provincial governments must co-operate with local authorities and schools in educating and training Canadians for the jobs that are in demand.

"Skills shortages in certain fields and regions could limit growth going forward," it warns, adding that the average apprenticeship completion rate was only 50 per cent between 2000 and 2011.

The OECD says some of the problem could be ameliorated by better data on job vacancies — a point made again Wednesday by economist Don Drummond in a paper for the Institute for Research in Public Policy.

Questions environmental record

The OECD was also critical of Canada's environmental record, calling the expansion of the oilsands in Alberta the principal reason the country won't come close to meeting its 2020 target on reduction of greenhouse gas emissions. That's because oilsands expansion is projected to increase oil and gas emissions by 23 per cent by 2020.

It recommends that Canada increase the pricing on carbon emissions, noting that currently it has one of the lowest effective tax rates on carbon among industrialized countries.

"We are on a collision course with nature," Gurria said of the report's findings. "We cannot sustain long-term growth in our economies if we do not protect and preserve our environment."