The International Monetary Fund has suggested that the Canadian government tighten the lending rules for uninsured mortgages, which it believes are contributing to an overvalued housing market.
“A possible sign of ‘leakage’ from tighter financial rules in Canada – which is a general problem that countries can face after tightening such rules – involves the expanding role of uninsured mortgages,” IMF’s Hamid Faruqee and Andrea Pescatori wrote in a new document entitled Canada’s Financial Sector: How to Enhance its Resilience.
The IMF commended the Canadian government for its prudent mortgage rule tightening, but it believes uninsured mortgages, which are frequently relied on by investors to finance new purchases, are a major contributor to house price increases in the single-family housing market.
“These loans with loan-to-value ratio below 80 per cent are not subject to the same regulatory tightening. These now comprise the bulk of mortgage originations and help fuel housing demand,” the pair wrote.
“If financial risks start rising again, policymakers may need to take further action to tighten rules on these loans.”
Such changes would need to be gradual to better mitigate any potential shocks to the economy, according to the IMF.
The pair has also suggested implementing two steps that will help identify and address any factors that could cause stress to the economy.
The first is to mandate a “macroprudential oversight of financial systems” – a single regulatory body that would hold policymakers accountable to respond to future economic crises.
The second is the implementation of a framework to help provincial and federal authorities to respond to any potential crises.
“Looking ahead, a broader issue is strengthening Canada’s policy frameworks designed to keep the overall financial system safe,” the pair wrote. “But there is a healthy debate over what approach works best.”