OECD: Real Estate Market Imbalances Localized

OECD Economic Surveys review the economies of member countries and they just released Canada’s most recent survey this week. The previous survey of Canada was back in September 2010. It’s a 40-page report, but below is a portion regarding Canada’s housing market in particular:

Canada experienced a significant increase in house prices in the run-up to the 2008 crisis, but unlike in many countries with a similar experience, notably the United States, Canadian house prices have continued to rise (Figure 7, Panel B).

Residential investment declined only slightly as a share of output during the global financial crisis and has since rebounded to close to the pre-recession peak (Figure 7, Panel A) and looks set to rise further, at least over the short term, given the latest figures on housing starts.

Indeed, the absence of a real estate collapse is an important reason for Canada’s relatively good economic performance during the crisis.

While there are some signs of market imbalances, they do not appear to be widespread but are concentrated in certain segments of the market (i.e. condominiums) and certain locations (Toronto and Vancouver). In particular, the stock of unoccupied multiple units has swelled (Figure 7, Panel F), even after accounting  for increases in multiple units in the market.

In recognition of the risks to financial stability posed by the housing sector, between October 2008 and April 2011 the federal government implemented a series of macro-prudential measures to tighten regulations of government-backed mortgage insurance.

First, the maximum amortisation period for new mortgages was reduced in stages from 40 to 30 years. Maximum LTV ratios needed to qualify for government guarantees were lowered. Government-backed insurance was also withdrawn on home equity lines of credit, and requirements were imposed on minimum credit scores and loan documentation.

Government-backed insurance also defines minimum qualifying interest rates which must be used in determining borrower eligibility for all variable rate loans and fixed rate loans under five years.

These changes have helped to moderate household borrowing and cool the housing market. However, further measures may be needed – possibly targeted on certain market segments – if imbalances persist.

You can download the entire report here.

(click to enlarge image)

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