Canada should consider lowering the total amount of mortgage insurance its government housing agency can write, and eventually getting out of the business completely to limit taxpayer risk, the Organization for Economic Cooperation and Development said.
Canada Mortgage and Housing Corp., which currently has a mortgage insurance cap of C$600 billion ($552 billion), could “progressively” lower the cap, and raise the amount private insurers can write from C$300 billion, the Paris-based research group said in a report today. CMHC’s mortgage insurance business role could be privatized over the longer term, the OECD said in its 2014 economic survey for Canada.
“Right now, government takes practically all the risk,” OECD Secretary-General Angel Gurria said during an interview today in Montreal. “This is a contingent liability of the taxpayers of Canada. There has to be some risk borne by the intermediary institutions and the borrowers themselves.”
The housing agency should require home buyers who need insurance to pay a deductible as is common for other types of policies. Under Canadian law, mortgages with a down payment less than 20 percent require insurance against default. CMHC is the biggest provider of the protection.
Finance Minister Joe Oliver has said he is studying ways to further scale back CMHC, which in the last few years has discontinued some other services and set higher skills requirements for top executives as risks from a building boom emerged. Residential investment has climbed to reach 7 percent of gross domestic product and consumer debt to a record 166 percent of disposable income, the OECD report said.
Still, the risk of a housing crash in Canada “appears low” even after the price rise and record levels of consumer indebtedness, the OECD said, a view shared by minister Oliver and Bank of Canada Governor Stephen Poloz.
“So far default rates are very low,” said Gurria. Still, “how much of the affordability becomes stressed when rates, as forecast, are going to move higher.”
The economy will benefit from growth that will quicken to 2.5 percent this year from 2.0 percent in 2013, the OECD said. Gross domestic product will expand by 2.7 percent in 2015 and spare capacity in the economy will disappear by the middle of next year, allowing the central bank to consider raising its 1 percent policy interest rate, the report said.
“The Bank should maintain its supportive policy stance for the time being,” the OECD report said. “But as slack diminishes, headwinds dissipate and inflation pressures rise, monetary accommodation will need to be progressively withdrawn to stabilize inflation around 2 percent.”
Inflation will quicken to 1.8 percent in 2015 from 1.6 percent this year, the report said. The jobless rate will decline to 6.6 percent next year from 6.9 percent this year.
Canada should also consider measures to limit disparities between commodity-rich provinces such as Alberta, which benefit from higher resource prices and manufacturing regions such as Ontario and Quebec, which bear the brunt of the stronger Canadian dollar, the OECD said.