In a breakdown piece for Bloomberg Business
, market analyst Luke Kawa noted that Cheng Hoon Lim, IMF Western Hemisphere Department assistant director, outlined a dilemma that the country’s real estate industry is supposedly facing at the moment.
“Canada’s housing market is sizzling hot and the Bank of Canada has a monetary policy dilemma: increase interest rates to cool the housing market would hurt borrowers and the economy; keep interest rates low adds fuel to the borrowing that led to the rise in housing prices and in household debt,” Lim wrote in a blog post, as quoted by Kawa in his article.
Kawa acknowledged that while the best-performing Canada markets remain overheated, the IMF is misunderstanding the situation.
“There is no dilemma here. The key flaw in this analysis is presenting this so-called problem for Canadian monetary policymakers as a binary choice dictated by the level of the policy rate,” he said.
“Policy rates are a particularly blunt way to bring about a slowing of activity in one part of the economy; macroprudential measures are much better suited to address sector-specific imbalances,” Kawa added. “The role played by Canadian monetary policymakers in fashioning macroprudential policy means that doing nothing isn't always the appropriate response when dealing with financial vulnerabilities.”
Among the greatest advantages of macroprudential policy is that it can be custom-fit into particular segments of Canada’s housing markets as needed, the analyst explained.
“For instance, rather than raise down-payment requirements, authorities could reintroduce the regional mortgage insurance cap, as Ben Rabidoux of North Cove Advisors Inc. has long advocated,” Kawa said.
Recent statements from the International Monetary Fund (IMF) cast the situation of Canada’s housing sector in a misleading light, according to an industry observer.