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IMF: Housing Prices 5 to 20 Percent Higher

Days after the Canadian Mortgage and Housing Corporation (CMHC) came out and released a report saying the housing market in Canada remains relatively stable, the International Monetary Fund (IMF) has released another report saying the Canadian real estate market is still 5-20% overvalued.

Although the IMF has softened it’s stance from earlier reports, IMF Official Hamid Faruqee noted that national home prices are still 5 to 20 percent higher than what the fundamentals indicate they should be. IMF however, expects a soft landing, rather than a collapse, similar to the US in 2008.

So what changed from it’s last report, where the IMF projected a much bigger overvaluation? The report cites that tighter insurance rules, reduced affordability, construction of multi-family units, and tighter lending requirements have contained price growth.

The report states that: “Further action may be needed if household balance sheet and housing market vulnerabilities resume rising.”

The most cited concerns for Canada:

– Interest Rate stability – if interest rates rise quickly, housing market can be in for a shock; very unlikely since Bank of Canada has been very stable in managing the rates

– Business investment – strong US dollar, and weak loonie has helped exporters and manufacturers, but that hasn’t resulted in increased business investments in Canada

– Canadian businesses not investing in long-term expansion, rather short term fixes

– Falling price of oil, combined with slowdowns in China/Europe, could result in a correction in housing prices

– CMHC overextending itself in housing insurance, although it is backed by the Government of Canada.

 

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