OECD: Implementing tighter macro-prudential measures a much-needed step

by Ephraim Vecina on 12 Jun 2017
In a statement last week, the Organization for Economic Co-operation and Development called on Canada to take more decisive steps such as tighter macro-prudential measures in order to address the multiple risks associated with high-priced housing markets in cities such as Toronto and Vancouver.

The organization—which echoed recent advice from the International Monetary Fund—is the latest in a growing chorus drawing attention to the outsized performance of Canada’s hottest real estate markets, The Canadian Press reported.

The OECD also pushed for greater use of policy tools such as national debt-to-income constraints that could be more restrictive in areas where house prices are inflated.

In addition, it criticized some of the Ontario government’s recent efforts to slow the rapid rise in Toronto-area home prices — specifically the expansion of rental control, which it said could discourage the supply of new rental housing and have broader economic ramifications.

“Low rental supply would hamper labour mobility — particularly for the poor and the young — which will make adjustment to globalization more costly and prolonged,” the OECD stated.

A number of federal measures have been introduced to tame Canada’s housing market in recent years, including expanded stress tests on mortgages, increased minimum down payment requirements and reduced amortization periods.

The OECD projected Canada’s economic growth rate to subside next year to 2.3 per cent, but that estimate would be at risk if there’s a “disorderly” decline in the Toronto and Vancouver housing markets.

“Such a correction would reduce residential investment, household wealth and consumption,” the organization’s report said. “A sufficiently large shock could even threaten financial stability.”

The OECD estimate for 2017 economic growth stood above the Bank of Canada’s estimate in April, which was increased to 2.6 per cent up from its January forecast of 2.1 per cent. Overall, the OECD’s latest world economic outlook predicted global growth of 3.5 per cent this year and 3.6 per cent in 2018, up from 3.0 per cent in 2016.

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