Housing prospects 'dismal': IMF

By STEVE LADURANTAYE
Globe and Mail Update

Says residential real estate will be a drag on worldwide economies for next 8 years, even in Canada

Residential housing will act as a drag on economies around the world for the next eight years, the International Monetary Fund said Wednesday, even in countries such as Canada that appear healthy.

In its October World Economic Survey, the organization warned of "dismal" prospects for real estate, saying "rebound" economies such as Canada and those in the Asia-Pacific region were faring well, but that government intervention to cool overheating markets means that real estate won't be a source of growth in the coming years.

The Canadian government stepped into the market earlier this year, making it more difficult to obtain a mortgage and requiring a higher down payment for investment properties. Higher interest rates in the next year are also expected to further quell the Canadian market, which has already shown signs of cooling.

As rates rise, many homeowners may not be able to afford the mortgages they took out when rates were low, the IMF cautioned.

"A feature of the real estate cycle over the past decade that differs vastly from past cycles is enhanced access to credit," the report stated.

"Easy monetary conditions and financial innovation gave households greater access to credit and led to a buildup in leverage. The process of deleveraging could make the macroecnomic impact of this housing bust greater than in the past."

Households take longer to deal with bad loans than financial institutions or the corporate sector, the IMF said, because houses can be difficult to sell. That's why a residential real estate recovery will take so long to happen.

"The recovery is likely to be slower than in recession triggered by problems related to corporate balance sheets," the report stated.

The report lumped Canada in with Asia-Pacific countries, because the recoveries in the real estate market have been similar. The IMF said "econometric estimates still show a deviation of house prices from fundamental values," cautioning that the Asian markets in particular are at risk from speculators trying to cash in on the market.

"In contrast to past recoveries, there appears to be little hope for a sustained upside boost to the overall economy from the real estate sector," the report stated. "In economies where real estate markets are in decline, the drag on real activity will continue. Where house prices and residential investment are rebounding, concern about bubbles is eliciting policy actions that will temper any short-term boost to economic activity."