The International Monetary Fund isn't totally convinced that Canadian authorities have a handle on the risks building up in the housing market.
"Developments on the housing front require increased vigilance, and consideration may need to be given to additional prudential measures to prevent a further buildup in household debt," the Washington-based IMF says in its latest economic outlook for the Western Hemisphere.
By prudential measures, the IMF means steps such as those Finance Minister Jim Flaherty took in January to curb mortgage borrowing, including the reduction of the maximum amortization period to 30 years from 35 years.
The reason for the IMF's concern is household debt, which is now as bloated in Canada as in notoriously profligate Britain and the United States. The debt of Canadians has inflated along with house prices, which have surged some 30 per cent since their trough in early 2009. As long as house prices remain elevated, that debt looks affordable. If prices slump, then there is a risk that households retrench, robbing the Canadian economy of domestic demand at a time when international demand for exports already is weak.
"Consumption might moderate more than expected from a large retrenchment in highly indebted households amid concerns of a drop in house prices," the IMF says. "The latter are estimated to be above levels dictated by economic fundamentals in some key provinces."
The fund calls the Harper government's plan to gradually eliminate the budget deficit "generally adequate" and advises the Bank of Canada to leave interest rates low so long as inflation remains in check.
But the need for accommodative monetary policy is precisely why authorities must look for other ways to restrain household debt. Businesses will need lower borrowing costs to offset the effects of weaker global demand and a stronger currency. Households, however, already have done enough borrowing, at least when it comes to real estate. Any further buildup of debt only risks a painful collapse.
Bank of Canada Governor Mark Carney sounded the alarm in a speech in Vancouver in June where he argued persuasively that Canada's real-estate boom had reached its limits.
For his part, Mr. Flaherty says he's satisfied he's done enough to curb the accumulation of mortgage debt.
The finance minister said in New York on Wednesday that he would need to see "clear evidence of a bubble in the housing market in Canada, which we have not seen," according to a report by Bloomberg News. Mr. Flaherty defined a bubble as "dramatic surges in prices in some part of the country." He also said the measures he took in January have led to "some softening in the Canadian housing market."
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