The International Monetary Fund says Ottawa should consider phasing out insuring home mortgages through Canada Mortgage and Housing Corp.
The advice is contained in the IMF’s latest economic report card on Canada, which projects modest economic growth of 2.25 percent for the country next year.
Such a recommendation, surprising from an international financial organization, appears to side with Finance Minister Jim Flaherty, who has recently questioned whether the federal government should be in the business of insuring higher-risk mortgages at all.
Some analysts have credited the system for providing much-needed confidence in Canada’s housing sector during the 2008–09 crisis, which many believe was sparked by a crisis in the U.S. mortgage market.
The IMF concedes that the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.
“We think banks lend too much to mortgages and too little to small and medium enterprises,” Roberto Cardarelli, the IMF mission chief for Canada, told reporters in a briefing in Toronto.
“We suspect the fact that banks may benefit from government-backed insurance on mortgages ... it sort of makes it easier for banks to do mortgages than other kinds of lending which, presumably, we think, is going to be more useful for the real economy.”
CIBC deputy chief economist Benjamin Tal says he believes the advice may be appropriate for the U.S., particularly prior to the crisis, but not necessarily for Canada, where the mortgage securitization market is a relatively small slice of the financial pie. CMHC can carry a maximum of $600 billion mortgage loan insurance on its books.
“In this case size matters,” he said. “It is true when securitization dominates the market it is not a very healthy thing, but when it is part of a normally functioning market, it actually helps the economy” by contributing to low borrowing rates and liquidity.
The Washington-based financial institution said further measures should be considered to “encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.”
It cautioned, however, that if any structural changes are made, they should be gradual to avoid unintended consequences.
The IMF report, released Wednesday, forecasts that Canada’s economy as a whole will start benefiting next year from a pickup in the U.S. economy, leading to greater demand for Canadian exports and renewed business investment.
In essence, the scenario is identical to the one predicted by the Bank of Canada, which also sees growth rising from the current 1.6 percent level to 2.3 next year.
A slightly more positive estimate was issued Wednesday by the Ottawa-based Conference Board of Canada, which is projecting Canadian real GDP will grow 1.8 percent in 2013, 2.4 percent in 2014, and 2.6 percent in 2015—assuming strong growth in the United States.
The Bank of Canada forecast holds that the risks are balanced—meaning there is as much chance the projected growth rate will be higher as lower.
But the IMF warns, however, that the risks to its outlook are primarily on the downside. The main reason, it says, is that it might be wrong about the U.S. economy rebounding in 2014.
“Renewed political standoff (in the United States) over spending appropriations and the debt ceiling and a faster-than-expected increase in long-term rates in the context of exit from quantitative easing could negatively affect the U.S. recovery and hence demand for Canadian exports,” the IMF said.
“Protracted weakness in the euro area economic recovery and lower-than-anticipated growth in emerging markets would also hurt the prospects for Canada’s exports, including through lower commodity prices,” it added.
On the domestic front, the IMF said the long period of low productivity growth and strong Canadian dollar may have left a deeper dent in Canada’s export potential, especially in the traditional manufacturing base, limiting the economy’s ability to benefit from the projected strengthening in external demand.
Cardarelli stressed the importance of investing in the energy sector, an industry that he said would have a significant impact on the organization’s economic forecasts in the future.
“We really feel that the system is stressed in terms of the transportation capacity—the ability of moving these resources out of Alberta, British Columbia, and Saskatchewan,” he said at a news conference in Toronto.
Among other things, the IMF recommends that Canada’s central bank hold off raising interest rates until there are firmer signs of a sustained transition from household spending to exports and investment, something bank governor Stephen Poloz has signalled he intends to do.
And it warns the federal government that it need not be so fixated on balancing the federal budget in 2015 if there is no meaningful pickup in economic activity.
That is likely to fall on deaf ears, however. Finance Minister Jim Flaherty said this week he is confident he will eliminate the deficit in 2015 and bring in surpluses after that.
With files from The Canadian Press
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