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Canadian Housing Prices Risk Slide: Report

Canada's housing market faces a risk of sliding prices, according to a report released Wednesday that warns the current global economic rebound from the 2008 crisis could falter.

The Organization for Economic Co-operation and Development's twice-a-year economic outlook report said the world economy is in an uneven recovery and confronting far more "downside" than "upside" risks.

The negative risks include the possibility of an inflationary rise in oil and other commodity prices, a deeper slowdown in China's economy, continued deficit problems and housing market weakness plaguing the United States and Japan, and mounting sovereign debt problems facing Europe.

"A concern is that, if downside risks interact, their cumulative impact could weaken the recovery significantly, possibly triggering stagflationary (high inflation in a stagnant economy) developments in some advanced economies," Pier Carlo Padoan, the OECD's deputy secretary-general and chief economist, said in his introduction to the report.

"All this suggests that the global crisis may not be over yet."

The Canadian economy, which has consistently scored near the top of the class in OECD analyses since the 2008 crisis, is given a relatively rosy outlook.

Canada's "vigorous" rebound over the winter is expected to moderate in the near term due to the impact on global trade of the Japanese tsunami and nuclear disaster, combined with reduced spending from heavily indebted households dealing with softening housing markets.

But the economy "will speed up again as unemployment recedes and the global recovery gains traction," said the OECD, a Paris-based social and economic policy think-tank funded by 34 western industrialized member countries, including Canada.

Plans by Prime Minister Stephen Harper's government to slash the deficit are expected to include a reduction in wages for public-sector workers, which will "weigh on household income," the OECD said.

Household debt, at a record 149 per cent of Canadians' disposable income in late 2010, will also dampen consumer spending.

The quiet satisfaction of watching real-estate values rise steadily is also expected to come to an end.

"Consumers are unlikely to be able to rely on further significant increases in house prices to improve their balance sheets. House prices are already high relative to incomes and rents, and the market appears to have stabilized and may cool."

Risks faced by the Canadian economy include fiscal belt-tightening in more indebted countries, especially the U.S., which could trim demand more than expected from Canada's key trading partners.

The OECD economists recommended that Bank of Canada governor Mark Carney's "highly stimulative" policy of keeping interest rates at or near rock-bottom levels should end in order to pre-empt rising inflation.

But there is a risk that Carney could be forced to raise rates more sharply than anticipated.

"Persistent geopolitical instability" could drive up commodity prices, "which would help Canadian exporters but may also raise inflation expectations, forcing a more rapid tightening of monetary policy than assumed," the OECD said.

"Such a scenario could trigger a more marked house price correction that significantly strains household and bank balance sheets."

The report said the high Canadian dollar and Canada's ongoing "sluggish" labour productivity are negative factors.

But the robust loonie "should nevertheless lower the cost of imported machinery and equipment and encourage capital spending," the OECD said.

"With firms benefiting from improving credit conditions, sound financial health and lower tax rates, business investment should remain an important driver of growth. Investment intentions appear especially strong in the energy sector, which is enjoying high world prices."

The Economic Outlook said the recovery, while still geographically uneven, is "becoming more self-sustained and more broad-based." Unemployment remains high and inflation is rising in most of the OECD, the report said.

Even stronger inflationary pressures in non-OECD countries such as China could prompt "policy restraint that could slow" the global recovery, Padoan wrote.

In addition to Canada and the U.S., the OECD membership includes Mexico, Chile, most of Western and Central Europe, Israel, Turkey, Japan, South Korea, Australia and New Zealand.