The International Monetary Fund (IMF) has released its latest assessment of the Canadian economy, emphasizing the critical issue of the ongoing housing crisis, which it describes as having “reached its worst levels in a generation”.
This article delves into the IMF’s findings, particularly focusing on the alarming state of housing affordability and its implications for Canada’s future.
Key Findings from the IMF’s Report
- Economic Stability Amid Global Risks:
- The IMF’s baseline forecast for Canada shows a balanced risk outlook. Potential global economic slowdowns could impact Canadian growth and inflation, while tight financial conditions due to persistent inflation, high wage growth, or a stronger USD could also pose challenges. Conversely, a robust labor market and unexpected growth in the US could boost Canada’s economic prospects.
- Soft Landing for the Economy:
- Canada has managed to avoid a recession while significantly reducing inflation. Although the GDP growth rate has slowed, and per capita income has declined due to the post-pandemic immigration surge, the country has maintained economic stability. Inflation is nearing the Bank of Canada’s target range, showing a steady decline.
- Severe Housing Affordability Crisis:
- Housing affordability in Canada has deteriorated to its worst level in a generation. Elevated mortgage interest rates, rising rents, and high property prices continue to strain the housing market. Despite increased housing starts, builders face challenges like a shortage of skilled labor, high financing costs, and regulatory barriers. Rental markets are particularly affected, with vacancy rates dropping to around 1% and rents skyrocketing.
- Financial Sector Resilience:
- Canadian banks remain well-capitalized and liquid, with delinquency rates for mortgage loans staying below pre-pandemic levels. While other loan types have seen increased delinquency rates, the commercial real estate sector is less problematic compared to other countries. Nonbank financial institutions are also stable, although data gaps limit a comprehensive evaluation.
Addressing the Housing Crisis
The IMF stresses the urgency of improving housing affordability to ensure the long-term viability of local economies and make homeownership accessible for younger generations. Here are the key recommendations:
- Boosting Housing Supply:
- Municipal Actions: Reduce red tape, rezone for densification, and use public lands effectively.
- Provincial Initiatives: Push municipalities to act and utilize policy levers more aggressively.
- Federal Involvement: Continue using financial incentives to encourage municipal governments to facilitate housing construction.
- Promoting Social Housing:
- Increase efforts to expand social housing, which currently makes up only 4% of Canada’s housing stock.
- Avoiding Demand-Boosting Measures:
- Measures that inadvertently increase housing demand should be avoided. The IMF suggests replacing the ban on nonresident housing purchases with a nondiscriminatory tax on speculative investments.
- Creating a National Housing Forum:
- Establish a national forum involving all levels of government, home builders, NGOs, and other stakeholders to coordinate efforts and address the housing crisis effectively.
The IMF believes that by implementing these strategies, Canada could tackle its severe housing affordability issues and ensure sustainable economic growth.