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Canadian Real Estate Posing Risks to Economy, OECD Says

Canada’s growing household indebtedness and rising real-estate prices are posing risks to the world’s 10th-largest economy that may require additional measures to rein in the market, the Organization for Economic Cooperation and Development said.

The Paris-based group of developed nations, in a report on Canada released today in Ottawa, said there are signs of “imbalances” in the Vancouver and Toronto real-estate markets as well as the condominium segment. The report said steps by Finance Minister Jim Flaherty to tighten mortgage insurance rules in recent years have helped.

Historically high levels of indebtedness are “making households vulnerable to a possible decline in real-estate prices,” according to the report. “Further measures may be needed, possibly targeted on certain market segments, if imbalances persist.”

Flaherty has shortened amortization rules for government-insured mortgages twice since 2008, lowering the limit to 30 years in January 2011. He’s also cut the maximum amount homeowners can borrow against the value of their homes, withdrawn government insurance on home-equity lines of credit, and introduced legislation that prevents lenders from using government-insured mortgages as collateral for debt known as covered bonds.

The absence of a real-estate collapse in the country is one reason Canada has had relatively good economic performance, according to the OECD, which estimates growth of 2.2 percent this year and 2.6 percent in 2013.

Low Rates

Still, a “prolonged period” of low interest rates that have helped fuel the recovery may have increased risks to the financial system, the OECD said. While the central bank can afford to keep “highly accommodative” rates given moderate inflation, it will have to consider raising borrowing costs if “downside risks fail to materialize.”

Bank of Canada Governor Mark Carney has kept the benchmark rate unchanged at 1 percent for 21 months, even amid signs the economy is approaching full capacity.

The OECD also said the government’s plan to erase its budget deficit by 2015 is “reasonable,” while the country’s strong fiscal outlook gives it scope to respond to any deterioration in the economy.

“Canada’s low indebtedness and well-earned reputation for fiscal probity allow it room to respond by slowing the pace of consolidation as needed,” it said.

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