IMF warns on house prices in Canada and elsewhere

House prices in Canada and most other developed nations are disarmingly high and a threat to the global economy, the IMF said Thursday.

International Monetary Fund says prices keep climbing to concerning levels

The IMF warns that Canada and other countries have house prices wildly out of line with their historical averages. (Ty Wright/Bloomberg)

House prices in Canada and many other developed nations are disarmingly high and a threat to the global economy, the IMF said Thursday.

In a speech accompanying the agency's latest version of its global housing price index, the International Monetary Fund says individual efforts to keep a lid on excessive borrowing for housing haven't had enough of an impact and the numbers show prices keep climbing from already concerning levels.

"Housing booms have different characteristics across countries and time periods," the IMF deputy director Min Zhu told a banking conference this week. "What is common is that when the bust comes, it very often damages financial stability and the real economy."

The latest set of IMF data includes some eye-popping numbers. While not all countries are currently experiencing a housing boom (prices are higher this year in 33 of the 51 countries the agency monitors), the huge gains seen in the ones that are booming are a danger to the whole system, the IMF says.

Canada is right near the top of the list of countries the IMF says has a dangerously overvalued housing market.

Prices in Canada are 33 per cent above their historical average when compared to incomes and 87 per cent above their historical average compared with rents.

House prices, Zhu said, are "well above the historical averages for a majority of countries. This is true, for instance, for Australia, Belgium, Canada, Norway and Sweden."

The latest data from the Canadian Real Estate Association shows that the average Canadian home is now worth $409,708, up 7.6 per cent in the past year.

That's a slowdown from some double-digit gains we've seen in recent years, but still well ahead of historical norms because of record low interest rates compelling some buyers to maybe borrow more than they should.

The era of 'benign neglect' of house price booms is over.- Min Zhu, IMF deputy director

Unsustainable borrowing is a requirement for bubbles, all of which have to burst or deflate eventually, experts say.

"The bursting of the real estate bubble in the United States was followed by the deepest global downturn since the Great Depression" Zhu said. "It reminded people of the collateral damage that can be triggered by housing collapses."

Housing crashes tend to be linked to broader economic recessions, and in fact housing-induced recessions tend to be "much deeper and generate more unemployment than normal recessions," the IMF warns.

Zhu said policymakers need to get tougher in implementing and using policy tools like borrowing limits, higher capital requirements for banks making risky loans, and even limiting the amount of foreign investment in housing markets.

"The era of ‘benign neglect’ of house price booms is over," he said.

To be fair, Canadian policymakers have moved repeatedly in recent years to do some of those things, by raising the minimum down payment level to five per cent, and cutting the maximum amortization period from 40 to 25 years. But unlike other countries, Canada doesn't even track the level of foreign buying that's happening on a national level.

The agency did give Canada credit for one policy in place here, that being the distinction between owner-occupied homes versus investment properties when tabulating loan-to-value ratios. (There's a little more leeway in how leveraged you can be when you're buying a home to live in yourself, but requirements for second properties are a lot more stringent.)

"Country-specific factors for housing cycles suggest that the policy response cannot be ‘one size fits all,'" Zhu said.