“A rapid rise of house prices can be a precursor of an economic downturn”
In its latest Interim Economic Outlook, the Organisation for Economic Co-operation and Development (OECD) has warned against the rise of home prices in Canada, despite slightly raising its economic growth forecast for the country.
It expects Canada’s economy to expand by 2.4% this year, slightly higher than its previous projection of 2.1%.
OECD said that advanced economies including Australia, Canada, Sweden and the UK have experienced rapid house price increases in recent years.
“As past experience has shown, a rapid rise of house prices can be a precursor of an economic downturn. House price-to-rent ratios are at record highs in several countries and above long-term averages in many others. Although there has been a slower accumulation of household debt in recent years, mortgage-debt-to-income ratios remain high in many countries.”
According to the Financial System Review released by the Bank of Canada last year, “high levels of indebtedness and housing market imbalances” are two “key vulnerabilities” of the country’s financial system.
“On a national basis, household indebtedness has continued to rise and, more importantly, so has the proportion of highly indebted households in many Canadian cities,” the report said.
As of December, the national ratio of debt to disposable income was approaching 170%.
“Rising indebtedness is sustained by strong growth in mortgage credit, and consumer credit (excluding home equity lines of credit) continues to grow at or slightly above the rate of income growth,” the report said.
To help tackle financial vulnerabilities, OECD suggested that countries:
• have robust early warning systems
• engage in active supervision
• use macroprudential instruments appropriately, including setting limits on mortgage loan-to-value and debt-service-to-income ratios
“The resilience of housing markets can be improved by addressing tax biases in favour of debt-financed home ownership and unnecessary obstacles to housing supply,” it added.
It expects Canada’s economy to expand by 2.4% this year, slightly higher than its previous projection of 2.1%.
OECD said that advanced economies including Australia, Canada, Sweden and the UK have experienced rapid house price increases in recent years.
“As past experience has shown, a rapid rise of house prices can be a precursor of an economic downturn. House price-to-rent ratios are at record highs in several countries and above long-term averages in many others. Although there has been a slower accumulation of household debt in recent years, mortgage-debt-to-income ratios remain high in many countries.”
According to the Financial System Review released by the Bank of Canada last year, “high levels of indebtedness and housing market imbalances” are two “key vulnerabilities” of the country’s financial system.
“On a national basis, household indebtedness has continued to rise and, more importantly, so has the proportion of highly indebted households in many Canadian cities,” the report said.
As of December, the national ratio of debt to disposable income was approaching 170%.
“Rising indebtedness is sustained by strong growth in mortgage credit, and consumer credit (excluding home equity lines of credit) continues to grow at or slightly above the rate of income growth,” the report said.
To help tackle financial vulnerabilities, OECD suggested that countries:
• have robust early warning systems
• engage in active supervision
• use macroprudential instruments appropriately, including setting limits on mortgage loan-to-value and debt-service-to-income ratios
“The resilience of housing markets can be improved by addressing tax biases in favour of debt-financed home ownership and unnecessary obstacles to housing supply,” it added.
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Canadian real estate’s troubles to deepen soon, observers warn
OECD: Middle-class households harmed the most by price growth
