IMF Calls for Further Measures to Cool Canada's Housing Market

By Paul Vieira Features Dow Jones Newswires

Canadian authorities should contemplate additional measures to cool real estate activity, and replace a tax on foreign home buyers with other measures that discourage speculation, the International Monetary Fund said Wednesday.

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The IMF said frothy housing markets in Toronto and Vancouver, coupled with elevated household debt levels, continue to pose significant risks to the Canadian economy and financial stability, at a time when officials may be preoccupied with potential changes to U.S. trade policy. The Canadian government tightened mortgage-financing rules last fall for the sixth time in nearly a decade, while provincial governments in British Columbia and Ontario have introduced their own measures in the past year to address housing affordability.

"A further tightening of macroprudential and tax-based measures to mitigate speculative and investment activity should be considered," the IMF said as part of a regular assessment of the Canadian economy. It advised that Ottawa and the provinces work more closer on a national scheme aimed at containing excesses in the housing market.

Risks posed by frothy housing prices and overextended households prompted Moody's Investors Service to downgrade the major Canadian banks, citing high private-sector debt levels. There has been heightened concern among global investors about Canada's housing sector in recent weeks due to cash-flow woes at alternative mortgage lender Home Capital Group Inc. Depositors began withdrawing cash at Home Capital after the country's top securities watchdog alleged the firm and former executives misled investors about the extent of a mortgage-fraud problem at the company.

The tenuous state of Canadian housing is one reason investors have opted to sell Canadian dollars, positioning the currency as one of the weakest performers year-to-date versus the U.S. dollar, according to Frances Donald, economist at Manulife Asset Management.

One measure embraced by the provinces of British Columbia and Ontario -- home to the Vancouver and Toronto housing markets, respectively -- is a tax on foreigners acquiring a house. The IMF said this "discriminates" against nonresidents, and warned foreigners should not be singled out for blame about annual house-price gains of 30% in Canada's biggest cities.

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The Washington-based organization said the surcharge of foreign home buyers, at 15% in both British Columbia and Ontario, should be scrapped and replaced with a combination of rules and tax-based measures that discourage speculative activity "without discriminating between residents and nonresidents."

A representative for Canadian Finance Minister Bill Morneau wasn't immediately available for comment.

The Bank of Canada releases next week its biannual review of the financial system, at which time it is expected to update its view on Canadian housing. Bank of Canada Gov. Stephen Poloz had warned house-price increases in Toronto were on an unsustainable path.

Write to Paul Vieira at paul.vieira@wsj.com

OTTAWA -- Canadian authorities should contemplate additional measures to cool real estate activity, and replace a tax on foreign home buyers with other measures that discourage speculation, the International Monetary Fund said Wednesday.

The IMF said frothy housing markets in Toronto and Vancouver, coupled with elevated household debt levels, continue to pose significant risks to the Canadian economy and financial stability, at a time when officials may be preoccupied with potential changes to U.S. trade policy. The Canadian government tightened mortgage-financing rules last fall for the sixth time in nearly a decade, while provincial governments in British Columbia and Ontario have introduced their own measures in the past year to address housing affordability.

"A further tightening of macroprudential and tax-based measures to mitigate speculative and investment activity should be considered," the IMF said as part of a regular assessment of the Canadian economy. It advised that Ottawa and the provinces work more closer on a national scheme aimed at containing excesses in the housing market.

Risks posed by frothy housing prices and overextended households prompted Moody's Investors Service to downgrade the major Canadian banks, citing high private-sector debt levels. There has been heightened concern among global investors about Canada's housing sector in recent weeks due to cash-flow woes at alternative mortgage lender Home Capital Group Inc. Depositors began withdrawing cash at Home Capital after the country's top securities watchdog alleged the firm and former executives misled investors about the extent of a mortgage-fraud problem at the company.

The tenuous state of Canadian housing is one reason investors have opted to sell Canadian dollars, positioning the currency as one of the weakest performers year-to-date versus the U.S. dollar, according to Frances Donald, economist at Manulife Asset Management.

One measure embraced by the provinces of British Columbia and Ontario -- home to the Vancouver and Toronto housing markets, respectively -- is a tax on foreigners acquiring a house. The IMF said this "discriminates" against nonresidents, and warned foreigners should not be singled out for blame about annual house-price gains of 30% in Canada's biggest cities.

The Washington-based organization said the surcharge of foreign home buyers, at 15% in both British Columbia and Ontario, should be scrapped and replaced with a combination of rules and tax-based measures that discourage speculative activity "without discriminating between residents and nonresidents."

A spokeswoman for Canadian Finance Minister Bill Morneau said the government is monitoring housing-market development closely, adding measures taken to date on tighten mortgage-financing rules will help ensure financial and economic stability.

The Bank of Canada releases next week its biannual review of the financial system, at which time it is expected to update its view on Canadian housing. Bank of Canada Gov. Stephen Poloz had warned house-price increases in Toronto were on an unsustainable path.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

May 31, 2017 17:41 ET (21:41 GMT)