Canada's Housing Bubble

Dec 23, 2010 Greg Quinn bloomberg.com

Canada’s economic recovery is fading and policy makers may need to provide further stimulus, the International Monetary Fund said, citing risks from high consumer debt and weak U.S. demand for the country’s products.

The Canadian economy will expand by 2.3 percent in 2011, slowing from this year’s 3 percent growth, the Washington-based fund’s executive board said in a report today, matching the most recent forecast from the Bank of Canada. In October, the IMF predicted a 3.1 percent expansion this year and 2.7 percent for next year.

New stimulus isn’t needed unless there is “a substantial deterioration in the outlook,” Charles Kramer, the IMF’s Mission Chief to Canada, said during a conference call. “The issues we are focused on mostly are the risks to the outlook and policies being ready to respond if those risks materialize.”

The central bank kept its main interest rate at 1 percent Dec. 7, saying trade had slowed growth in the second half and consumers should ensure record debt loads remain affordable when interest rates rise. Earlier this month, Prime Minister Stephen Harper extended a deadline for stimulus spending on construction projects for seven months, citing a fragile global recovery.

The IMF “welcomed” the extended spending deadline and said “fiscal policy had ample room to respond if downside risks materialized.” The Bank of Canada “will have room for stimulus if needed” as well, the report said.

“Risks are elevated and tilted to the downside with high household debt levels the main domestic risk, and a weaker U.S. outlook the largest external risk,” the report of an annual economic review said.

Debt Worries

Harper, along with Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty, said in separate appearances on Dec. 14 that they are concerned about rising debt levels. The ratio of household debt to disposable income in Canada was 1.48 in the third quarter according to Statistics Canada, exceeding the U.S. level of 1.47.

Weaker U.S. demand helped drive Canada’s current account deficit to a record C$17.5 billion ($17.2 billion) in the third quarter. The goods surplus with the U.S., Canada’s biggest trade partner, declined by about C$3 billion for a second quarter between July and September, Statistics Canada said Nov. 29.

The IMF staff report prepared for the consultation said that home prices are “elevated” without indicating “a bubble in housing markets.” A separate staff report said house price movements were largely in line with fundamentals, “with the possible exceptions of Ontario and British Columbia.”

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