Canada’s economic outlook took a big hit this morning as the International Monetary Fund downgraded the nation’s financial outlook. Inflated consumer debt levels and a shaky housing market were at the heart of the downgrade, which was announced in Tokyo this morning at the IMF-World Bank annual meeting.
The Washington-based global lender’s quarterly World Economic Outlook downgraded Canada’s economic advance from 2.1 percent to 1.9 percent for 2012. Next year’s growth was also altered from 2.2 percent to 2.0 percent. Currently, the Bank of Canada has estimated growth of 2.1 percent for this year and 2.3 percent for 2013. The central bank doesn’t issue it’s next forecast until October 24 when the Monetary Policy Report is released.
Housing Sector Risks
The IMF is especially worried about risks in Canada’s housing sector. This morning’s release included the following statement: “In Canada, the key priority is to ensure that risks from the housing sector and increases in household debt remain well contained and do not create financial sector vulnerabilities.” The IMF also stated that, although Ottawa has taken measures to reign in debt through recent mortgage rule improvements, further steps may be required.
“If household leverage continues to rise, additional measures may need to be considered.”
Additional Factors
While housing lies at the heart of Canada’s financial outlook, exterior factors, including our global partners, could also cause some commotion. Not surprisingly, our strong economic ties to the struggling U.S. economy could open the nation up to additional threats. The IMF felt that, “in the United States, it is imperative to avoid excessive fiscal consolidation (the fiscal cliff) in 2013, to raise the debt ceiling promptly, and to agree on a credible medium-term fiscal-consolidation plan.”
With that being said, the IMF expects the American economy to grow more than it initially forecasted. The IMF increased the U.S. outlook from 2.0 percent to 2.2 percent. Next year’s outlook remains bleak however; the IMF has projected growth will be down to 2.1 percent rather than the earlier forecast of 2.3 percent.
Are We in a Housing Bubble?
While Canada has managed to avoid many of the mistakes that the U.S. made in its housing market collapse, we aren’t free and clear of a market burst just yet. According to Euro Pacific Capital, Canadian home prices are up nearly 100 percent since 2000, this at a time when the nation’s economic outlook has become increasingly uncertain.
Affordability rates are also on the way up, (a rise in this indicator actually reflects a deterioration in affordability). The historical average of housing affordability is roughly 39.5 percent. The nation’s affordability climbed to 43.4 percent during the second quarter. That’s nothing compared to Vancouver’s affordability, which now rests at a staggering 91 percent.
These numbers could increase even more if the Bank of Canada were to decide to raise interest rates early next year. According to experts, if Europe’s crisis is contained and the U.S. economy rebounds, Canada’s bank will be forced to raise rates, which would impact housing affordability almost immediately.
The Canadian housing marketing is already cooling. If you’re in the market for a best rate mortgage, now’s the time to secure your rate. Contact a mortgage broker today to lock down an affordable rate.