Abstract
Selected Issues and Analytical Notes
Macroprudential Tools at Work in Canada1
1. The aim of this paper is to assess which macroprudential policy measures have been effective in containing house price and mortgage credit growth in Canada and other economies. Our analysis indicates that macroprudential policy measures have had a moderating effect on house prices and mortgage credit in Canada since 2010. International experience suggests that lower caps on debt-service-to-income (DSTI) ratios and loan-to-value ratios could be effective in containing both mortgage credit and house price growth.
2. The discussion below is organized as follows. First, we analyze the effectiveness of macroprudential measures in Canada, then we discuss lessons from the international experience with macroprudential measures. Finally, we offer concluding remarks.
A. Assessing the Effectiveness of Macroprudential Measures in Canada
3. A distinctive feature of Canada’s prudential toolkit stems from a large government role in mortgage insurance. More than a half of outstanding mortgage debt is covered by mortgage insurance due to a requirement that borrowers must obtain insurance for high loan-to-value (LTV) mortgages (with LTV over 80 percent). 2 Government-backed mortgage insurance is provided by the Canada Mortgage and Housing Corporation (CMHC) - a crown corporation with half the market share of new insured mortgages3 - and two private companies. The government guarantees 100 percent of CMHC’s obligations and backs private mortgage insurers’ obligations subject to a deductible equal to 10 percent of the original principal amount of the mortgage loan. To address risks associated with the provision of these guarantees, the government sets eligibility requirements for insured mortgages. This serves as an important macroprudential tool in addition to traditional macroprudential tools available to the regulators responsible for financial stability.
4. Since 2000s Canada’s policies managing housing market risks have gone through two contrasting stages:
Easing up to 2007. Mortgage insurance rules were relaxed in the mid-2000s. Together with lower interest rates, this boosted mortgage credit and housing prices. The higher house prices led to a sharp expansion of home equity credit lines.
Tightening since 2008. As house prices and mortgage credit surged, the government’s focus changed to containing the growth of imbalances in the housing market as well as to reduce its exposure to mortgage insurance. Since 2008, the federal government has undertaken multiple rounds of measures to tighten mortgage insurance rules, going beyond a reversal of the loosening in the mid-2000s (Table A1). In addition, OSFI introduced numerous microprudential measures to strengthen bank balance sheets (Table A2).
5. Our analysis focuses on macroprudential policy measures related to changes in mortgage insurance rules during the tightening stage. Here we distinguish six rounds of macroprudential measures introduced in 2008, 2010, 2011, 2012, early-2016 and late-2016 (Table 1). We did not include the increases in mortgage insurance premia in 2014 and 2015 into our empirical exercise as the changes were too small to have an impact on credit demand.4
Canada: Macroprudential Measures Related to Changes in Mortgage Insurance Rules Since 2008
Canada: Macroprudential Measures Related to Changes in Mortgage Insurance Rules Since 2008
| 2008 round | October 2008 (announced in July) | Maximum amortization for new government backed insured mortgages was lowered (from 40 to 35 years) Maximum LTV for new mortgages was reduced (from 100 percent to 95 percent) Minimum credit score requirement (of 620) for high ratio mortgages was introduced. Maximum of 45 per cent total debt service ratio was introduced (the amount of gross income that is spent on servicing debt and housing-related expenses such as heat or condo fees). Loan documentation standards strengthened to ensure reasonableness of property value and of the borrower’s sources and level of income |
| 2010 round | April 2010 (announced in February) | Maximum LTV for insured refinanced mortgages was lowered (from 95 percent to 90 percent) Minimum down payment on properties not occupied by owner was raised (from 5 percent to 20 percent) More stringent eligibility criteria were introduced (all borrowers are required to meet the standards for a five-year fixed-rate mortgage, even if they choose a mortgage with a variable interest rate and shorter term. Specifically, the debt service ratios for borrowers opting for a variable-rate or short-term mortgages were to be calculated at the greater of the contract rate or Bank of Canada posted rate.) |
| 2011 round | March 2011 (announced in January) | Maximum amortization for new government backed insured mortgages was lowered (from 35 to 30 years) Maximum LTV for refinanced mortgages was lowered (from 90 percent to 85 percent) Government-backed insurance on non-amortizing lines of credit secured by houses (HELOCs) withdrawn in April |
| 2012 round | July 2012 (announced in June) | Maximum amortization for new government backed insured mortgages was lowered (from 30 to 25 years) Maximum LTV for refinanced mortgages was lowered (from 85 percent to 80 percent) Maximum gross debt service ratio and maximum total debt service ratios were capped at 39 percent and 44 percent, respectively Government-backed insured mortgages limited to homes with a purchase price of less than Can$1 million. |
| Not included | May 2014 (announced in February 2014) | Mortgage insurance premiums were raised |
| Not included | June 2015 (announced in April 2015) | Mortgage insurance premiums were raised |
| Early 2016 round | February 2016 (announced in December 2015) | The minimum down payment for new insured mortgages increased from 5 to 10 percent for the portion of the house price above $500,000. The 5 percent minimum down payment for properties up to $500,000 remained unchanged |
| Late 2016 round | October 17, 2016 (announced on October 3, 2016) | To ensure the uniform rules for all insured mortgages, all new mortgage borrowers with a down payment of less than 20% and seeking mortgage insurance are required to qualify at the posted rate for a conventional mortgage for a five-year term or the contract rate, whichever is higher. |
| November 30, 2016 (announced on October 3, 2016) | The standards for low-ratio mortgage portfolio insurance are tightened to become uniform with those for insured high-ratio mortgages. |
Canada: Macroprudential Measures Related to Changes in Mortgage Insurance Rules Since 2008
| 2008 round | October 2008 (announced in July) | Maximum amortization for new government backed insured mortgages was lowered (from 40 to 35 years) Maximum LTV for new mortgages was reduced (from 100 percent to 95 percent) Minimum credit score requirement (of 620) for high ratio mortgages was introduced. Maximum of 45 per cent total debt service ratio was introduced (the amount of gross income that is spent on servicing debt and housing-related expenses such as heat or condo fees). Loan documentation standards strengthened to ensure reasonableness of property value and of the borrower’s sources and level of income |
| 2010 round | April 2010 (announced in February) | Maximum LTV for insured refinanced mortgages was lowered (from 95 percent to 90 percent) Minimum down payment on properties not occupied by owner was raised (from 5 percent to 20 percent) More stringent eligibility criteria were introduced (all borrowers are required to meet the standards for a five-year fixed-rate mortgage, even if they choose a mortgage with a variable interest rate and shorter term. Specifically, the debt service ratios for borrowers opting for a variable-rate or short-term mortgages were to be calculated at the greater of the contract rate or Bank of Canada posted rate.) |
| 2011 round | March 2011 (announced in January) | Maximum amortization for new government backed insured mortgages was lowered (from 35 to 30 years) Maximum LTV for refinanced mortgages was lowered (from 90 percent to 85 percent) Government-backed insurance on non-amortizing lines of credit secured by houses (HELOCs) withdrawn in April |
| 2012 round | July 2012 (announced in June) | Maximum amortization for new government backed insured mortgages was lowered (from 30 to 25 years) Maximum LTV for refinanced mortgages was lowered (from 85 percent to 80 percent) Maximum gross debt service ratio and maximum total debt service ratios were capped at 39 percent and 44 percent, respectively Government-backed insured mortgages limited to homes with a purchase price of less than Can$1 million. |
| Not included | May 2014 (announced in February 2014) | Mortgage insurance premiums were raised |
| Not included | June 2015 (announced in April 2015) | Mortgage insurance premiums were raised |
| Early 2016 round | February 2016 (announced in December 2015) | The minimum down payment for new insured mortgages increased from 5 to 10 percent for the portion of the house price above $500,000. The 5 percent minimum down payment for properties up to $500,000 remained unchanged |
| Late 2016 round | October 17, 2016 (announced on October 3, 2016) | To ensure the uniform rules for all insured mortgages, all new mortgage borrowers with a down payment of less than 20% and seeking mortgage insurance are required to qualify at the posted rate for a conventional mortgage for a five-year term or the contract rate, whichever is higher. |
| November 30, 2016 (announced on October 3, 2016) | The standards for low-ratio mortgage portfolio insurance are tightened to become uniform with those for insured high-ratio mortgages. |
Methodology
6. We estimate two separate equations, for mortgage credit and house prices, assuming that macroprudential measures affect house prices indirectly through the mortgage credit. Each equation is estimated separately using OLS.5 All variables are monthly in a sample from August 1998 to February 2017.
7. For mortgage credit growth, we estimate the following specification:
where Mt is mortgage credit year-on-year growth rate;
Xt is a matrix of control variables including the unemployment rate and hourly wage growth, five-year mortgage interest rate,6 and house price growth. The control variables enter the equations with lags to account for delays in the response of mortgage credit to changes in the explanatory variables.
Dti stands for a dummy variable equal to 1 in the months following the implementation of a set of macroprudential measures i (2008, 2010, 2011, 2012, and two 2016 rounds) and zero otherwise. To isolate the effects of individual rounds of measures, each dummy variable takes a value of 1 until the end of the sample. We assess the impact of the rounds of measures on mortgage credit using the entire sample, but also test the impact over 1, 3, 6, and 9 months after they were introduced, and for the whole period between rounds.7
Separately, we test the effectiveness of individual measures and replace the dummy variable in specification (1) with changes in a specific instrument, such as the maximum LTV ratio for new and refinancing loans and amortization period.
8. For house price growth, we estimate the following specification:
where Ht is house price year-on-year growth rate;
Yt is a matrix of lagged control variables including the growth rate of the number of completed but unsold houses, mortgage credit growth, nominal GDP growth, and growth of sales of existing houses.8 The control variables enter the equations with lags to account for the delay in the house price response to changes in their determinants.
Results
9. The estimated specification (1) suggests the following effectiveness of the individual rounds of macroprudential measures (Table A3):
2008 round does not appear to have had an impact on mortgage credit growth. The estimated coefficient for the 2008 measures is not statistically significant across the different specifications. The lack of effects could be related to the limited scope of the measures: the maximum amortization period for new government backed insured mortgages was lowered from 40 to 35 years but remained high; and even though the maximum LTV for new mortgages was reduced from 100 to 95 percent, the effective LTV ratio was still at 100 percent.9 Credit growth did decelerate in the 12 months following the measures, but this was likely due to the cyclical downturn in the economy accompanied by higher unemployment and a decline in household income.
2010 round had a statistically significant impact on mortgage credit growth, dampening it by about 2.3 percentage points on average. The package of measures included a lower LTV ratio on refinancing loans, a significant increase in the down payment on properties not occupied by owners (from 5 to 20 percent), and tighter eligibility criteria that prevented some potential borrowers from qualifying for mortgages.
2011 round also appears to have reduced mortgage credit growth, by about 0.9 percentage points on average. The implemented measures further lowered the LTV ratio on refinancing loans and brought the maximum amortization period closer to the average. This likely prevented more borrowers from taking new loans and reduced the size of the loans.10
2012 round seems to have been the most effective one as it trimmed down mortgage credit growth by an estimated 3 percentage points on average. The effect appears to have gotten stronger over time. The measures focused on the amortization period, the LTV ratio for mortgage refinancing and DTIs. The new LTV ratio on refinance loans (down to 80 percent) was likely quite effective, as more than half of the new insured refinance loans in the period before the 2012 measures had a LTV ratio higher than 85 percent. These measures reduced the effective LTV for first-time home buyers from 100 to 95 percent.11 The effects of the 2012 measures might have also captured new mortgage underwriting standards implemented by OSFI at the end of fiscal year 2012.
Early 2016 round did not seem to have an impact on mortgage credit growth, possibly because it affected a relatively small proportion of the mortgage market. The 2016 tightening of mortgage insurance rules included increasing the minimum down payment for new insured mortgages from 5 to 10 percent but only for the portion of the house price above $500,000.12
Late 2016 round seems to have been effective in reducing mortgage credit growth. Estimates suggest that more stringent qualifying rules had an immediate effect on mortgage credit growth, as they tightened underwriting standards and affected all new borrowers with a down payment below 20 percent. These results, however, are based on few observations and should be interpreted with caution.
10. The results for individual measures suggest similar effectiveness of tighter LTVs for new mortgages and refinancing loans. The estimates indicate that a one percentage point reduction in both the maximum LTV for new mortgages and for refinancing loans tends to reduce y/y credit growth by about 0.5 percentage points (Table A4). Reducing the amortization period by one year appears to have lowered credit growth by 0.2 percentage points.13
11. Estimates suggest that there is a strong link between mortgage credit and house price growth. The estimated equation for house price growth indicates that other things being equal mortgage credit growth has a one-for-one effect on house price growth (Table A5). This means that tighter mortgage insurance rules indirectly dampened house price growth by reducing mortgage credit growth.
12. The household debt to income ratio would have likely been even higher had the authorities not acted. We calculate the fitted regression values of mortgage growth rates both with the measures and without them. Other things being equal, without these measures the average mortgage credit growth since April 2010 would have been higher by more than 5 percentage points. The household debt-to-income ratio would have been closer to 200 percent as of the third quarter of 2016, instead of the actual 167 percent.
B. International Experience
13. Economies around the world have used a variety of policy tools to deal with house price and mortgage credit booms. These include traditional monetary and fiscal policies, including transaction tax, property tax, sellers’ and buyers’ duty (Crowe et al., 2011 and Dell’Ariccia et al., 2012) and other macroprudential measures (see Appendix in Lim and others (2013)). Caps on LTV, and the DSTI ratio, provisioning requirements and risk weights are among the most frequently used tools.14
14. We update the macroprudential dataset in Lim and al. (2013) and examine the international experience over 2000–16 with four most frequently used measures: limits on LTV ratios; caps on DSTI ratios; greater risk weights for banks’ credit assets; and higher provisioning requirements for banks. We estimate their impact on mortgage credit and house price growth with panel data regressions across a sample of 35 economies controlling for the business cycle and the cost of borrowing.15
Economies in the Dataset
Economies in the Dataset
| Argentina | India | Poland |
| Australia | Ireland | Romania |
| Bulgaria | Israel | Serbia |
| Canada | Korea | Singapore |
| China | Latvia | Spain |
| Colombia | Lithuania | Sweden |
| Croatia | Luxembourg | Switzerland |
| Czech Republic | Malaysia | Thailand |
| Estonia | Netherlands | Turkey |
| Finland | New Zealand | United Kingdom |
| Hong Kong SAR | Norway | Uruguay |
| Hungary | Peru |
Economies in the Dataset
| Argentina | India | Poland |
| Australia | Ireland | Romania |
| Bulgaria | Israel | Serbia |
| Canada | Korea | Singapore |
| China | Latvia | Spain |
| Colombia | Lithuania | Sweden |
| Croatia | Luxembourg | Switzerland |
| Czech Republic | Malaysia | Thailand |
| Estonia | Netherlands | Turkey |
| Finland | New Zealand | United Kingdom |
| Hong Kong SAR | Norway | Uruguay |
| Hungary | Peru |
For mortgage credit growth, we estimate the following specification:
where M is real mortgage credit year-on-year growth;
X is a matrix of variables including lagged real mortgage credit growth, real GDP growth, and real lending rates;
D stands for an MPP measure. Following Krznar and Morsink (2014), we use a “step function variable” for each macroprudential instrument, that is, a variable that increases (decreases) by one every time the instrument is tightened (loosened) and stays there until the instrument is changed. For house price growth, we estimate the following specification:
where H is real house price year-on-year growth;
Y is a matrix of variables including lagged real house price growth, real GDP growth, and real lending rates;
D stands for an MPP measure, constructed as a “step function variable”.
We use GMM Arrellano-Bond estimator, which is designed for the situations with fixed individual effects and explanatory variables that are not strictly exogenous.16
15. The results suggest that all four measures can be effective in containing mortgage credit growth (Table A6). The economies that lowered the caps on the LTV and DSTI ratios, tightened provisioning requirements or raised risk weights for banks’ credit assets moderated the mortgage credit growth rate on average by 0.9-2 percentage points.
16. Lower caps on LTV and DSTI ratios appear to have a statistically significant but economically small effect on house price growth (Table A7). Both measures contained the house price growth by about 0.4 percentage points.
C. Conclusion
17. Canada’s macroprudential policy seems to have lowered mortgage credit growth thus moderating the surge in house prices on a national basis. The 2010, 2011, 2012 and late 2016 rounds of measures are estimated to have been effective, possibly due to their larger scope and size.
18. International experience over 2000-16 suggests that tighter LTV limits and lower caps on DSTI ratios could be effective in moderating both mortgage credit and house price growth. Canada’s DSTI limits are relatively stringent compared to the other economies, but the limits on the LTV ratio are above the average in our sample of economies. Further tightening of the LTV ratios could help contain growth in mortgage credit and house prices.
Debt Service-To-Income Limits, End-2016
(Percent)
Citation: IMF Staff Country Reports 2017, 211; 10.5089/9781484309650.002.A004
Sources: Authorities and the IMF Database of Macroprudentail Measures.Loan-To-Value Limits, End-2016
(Percent)
Citation: IMF Staff Country Reports 2017, 211; 10.5089/9781484309650.002.A004
Sources: Authorities and the IMF Database of Macroprudentail Measures.Annex I. Annex Tables
Canada: Mortgage Insurance Products Until 2008
Canada: Mortgage Insurance Products Until 2008
| 2003 | Genworth Financial broadened the eligible sources of funds for the minimum down payment, allowing it to be borrowed as opposed to coming from the borrowers’ unencumbered funds |
| March 2004 | CMHC “Flex Down” program broadened the eligible sources of funds for the minimum down payment (5 percent), allowing it to be borrowed as opposed to coming from the borrowers’ unencumbered funds |
| March 2006 | CMHC: 0 percent down payment, 30-year amortizations |
| Genworth announces 30/35-year amortizations, Genworth Financial has been offering a similar “Business for Self” product (self-employed) | |
| June 2006 | CMHC: 0 percent down payment, 35-year amortizations; insurance on interest-only mortgages |
| October 2006 | Genworth announces 40-year amortizations |
| December 2006 | CMHC started to insure 40-year loans |
| March 2007 | CMHC started to insure mortgage loans to self-employed |
| July 2007 | LTV limit after which a loan must be insured increased to 80 percent (from 75 percent) |
Canada: Mortgage Insurance Products Until 2008
| 2003 | Genworth Financial broadened the eligible sources of funds for the minimum down payment, allowing it to be borrowed as opposed to coming from the borrowers’ unencumbered funds |
| March 2004 | CMHC “Flex Down” program broadened the eligible sources of funds for the minimum down payment (5 percent), allowing it to be borrowed as opposed to coming from the borrowers’ unencumbered funds |
| March 2006 | CMHC: 0 percent down payment, 30-year amortizations |
| Genworth announces 30/35-year amortizations, Genworth Financial has been offering a similar “Business for Self” product (self-employed) | |
| June 2006 | CMHC: 0 percent down payment, 35-year amortizations; insurance on interest-only mortgages |
| October 2006 | Genworth announces 40-year amortizations |
| December 2006 | CMHC started to insure 40-year loans |
| March 2007 | CMHC started to insure mortgage loans to self-employed |
| July 2007 | LTV limit after which a loan must be insured increased to 80 percent (from 75 percent) |
Canada: Microprudential Measures
Canada: Microprudential Measures
| June 2011 (effective on January 1, 2013) | Protection of Residential Mortgage Hypothenar Insurance Act (PRMHIA) and amendments to the National Housing Act assented |
| − Formalizes the rules for government-backed mortgage insurance and other existing arrangements with private mortgage insurers | |
| − Provision for the Minister of Finance to charge fees to compensate the Government for its exposure to risk represented by loan insurance | |
| November 2011/January 2012 | IFRS standards were implemented requiring banks to report debt securitizations on balance sheet |
| March 2012 | Economic Action Plan 2012 announcements |
| − Canadian banks prohibited from issuing covered bonds backed by government-insured mortgages (sets strong eligibility criteria for mortgages in the cover pool) | |
| − CMHC designated as administrator of the covered bond framework | |
| − CMHC’s mandate was enhanced to include financial stability as an objective of CMHC’s commercial activities | |
| − CMHC commercial activities subject to OSFI examination | |
| June 2012 | Guideline on Sound Residential Mortgage Underwriting Practices (B-20) |
| − A guideline for residential mortgage underwriting practices and procedures was issued by OSFI (including assessment of borrower’s background and demonstrated willingness to service debt payment in a timely manner, assessment of borrower’s capacity to service debt, assessment of property value/collateral effective credit and counterparty risk management, comprehensive residential mortgage underwriting policy) | |
| − Maximum LTV on the revolving portion of HELOCs cut (from 80 to 65 percent) | |
| − Stated Income mortgages are no longer allowed without some verification of income | |
| February 2014 | Economic Action Plan 2014: |
| − CMHC will pay guarantee fees to the Receiver General to compensate for mortgage insurance risks (pursuant to NHA 8.2), effective January 1, 2014. This will align CMHC with guarantee fees paid by private mortgage insurers. Fees are 3.25 percent of premiums written and 10 basis points on new portfolio insurance written | |
| − CMHC reduced its annual limit of issuance of portfolio insurance from $11 billion to $9 billion | |
| − For 2014, the Minister of Finance authorized $80 billion for NHA MBS (down from $85 billion in 2013) and $40 billion for CMB (down from $50 billion in 2013) | |
| September 2014 (effective on January 1, 2015) | Revised Minimum Capital Test Guideline for property and casualty insurers |
| − The guideline introduced new and updated risk factors and margins plus a revised definition of available capital | |
| May 15, 2015 | Amendments to PRMHIA. Substitution of loans in portfolio insurance pools was prohibited to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector |
| June 30, 2015, full implementation (announced in November 2014) | Residential Mortgage Insurance Underwriting Practices and Procedures (Guideline B21) was issued. This guideline:
|
| December 11, 2015 | CMHC announced changes to its securitization programs |
| − Changes in the guarantee fee schedule (effective July 1, 2016). Fees were raised for large MBS issuers | |
| − For 2016, the Minister of Finance authorized $105 billion for NHA MBS and $40 billion for CMB. | |
| December 11, 2015 (effective November, 2016 | OSFI updated the regulatory capital requirements for residential mortgages: |
| − OSFI imposed a risk-sensitive floor for one of the model inputs (losses in the event of default) that tied to increases in local property prices and/or to house prices that are high relative to borrower incomes | |
| − For federally regulated private mortgage insurers, OSFI introduced a new standardized approach updating the capital requirements for mortgage guarantee insurance risk. It requires more capital when house prices are high relative to borrower incomes | |
| February 10, 2016 (effective July 1, 2016) | The DOF required that portfolio-insured loans be funded only through CMHC securitization programs |
| October 3, 2016 | A consultation process with market participants on lender risk sharing was launched. The goal is to find ways to limit the federal government’s financial obligations in the event of mortgage defaults and promote prudent lending practices. |
Canada: Microprudential Measures
| June 2011 (effective on January 1, 2013) | Protection of Residential Mortgage Hypothenar Insurance Act (PRMHIA) and amendments to the National Housing Act assented |
| − Formalizes the rules for government-backed mortgage insurance and other existing arrangements with private mortgage insurers | |
| − Provision for the Minister of Finance to charge fees to compensate the Government for its exposure to risk represented by loan insurance | |
| November 2011/January 2012 | IFRS standards were implemented requiring banks to report debt securitizations on balance sheet |
| March 2012 | Economic Action Plan 2012 announcements |
| − Canadian banks prohibited from issuing covered bonds backed by government-insured mortgages (sets strong eligibility criteria for mortgages in the cover pool) | |
| − CMHC designated as administrator of the covered bond framework | |
| − CMHC’s mandate was enhanced to include financial stability as an objective of CMHC’s commercial activities | |
| − CMHC commercial activities subject to OSFI examination | |
| June 2012 | Guideline on Sound Residential Mortgage Underwriting Practices (B-20) |
| − A guideline for residential mortgage underwriting practices and procedures was issued by OSFI (including assessment of borrower’s background and demonstrated willingness to service debt payment in a timely manner, assessment of borrower’s capacity to service debt, assessment of property value/collateral effective credit and counterparty risk management, comprehensive residential mortgage underwriting policy) | |
| − Maximum LTV on the revolving portion of HELOCs cut (from 80 to 65 percent) | |
| − Stated Income mortgages are no longer allowed without some verification of income | |
| February 2014 | Economic Action Plan 2014: |
| − CMHC will pay guarantee fees to the Receiver General to compensate for mortgage insurance risks (pursuant to NHA 8.2), effective January 1, 2014. This will align CMHC with guarantee fees paid by private mortgage insurers. Fees are 3.25 percent of premiums written and 10 basis points on new portfolio insurance written | |
| − CMHC reduced its annual limit of issuance of portfolio insurance from $11 billion to $9 billion | |
| − For 2014, the Minister of Finance authorized $80 billion for NHA MBS (down from $85 billion in 2013) and $40 billion for CMB (down from $50 billion in 2013) | |
| September 2014 (effective on January 1, 2015) | Revised Minimum Capital Test Guideline for property and casualty insurers |
| − The guideline introduced new and updated risk factors and margins plus a revised definition of available capital | |
| May 15, 2015 | Amendments to PRMHIA. Substitution of loans in portfolio insurance pools was prohibited to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector |
| June 30, 2015, full implementation (announced in November 2014) | Residential Mortgage Insurance Underwriting Practices and Procedures (Guideline B21) was issued. This guideline:
|
| December 11, 2015 | CMHC announced changes to its securitization programs |
| − Changes in the guarantee fee schedule (effective July 1, 2016). Fees were raised for large MBS issuers | |
| − For 2016, the Minister of Finance authorized $105 billion for NHA MBS and $40 billion for CMB. | |
| December 11, 2015 (effective November, 2016 | OSFI updated the regulatory capital requirements for residential mortgages: |
| − OSFI imposed a risk-sensitive floor for one of the model inputs (losses in the event of default) that tied to increases in local property prices and/or to house prices that are high relative to borrower incomes | |
| − For federally regulated private mortgage insurers, OSFI introduced a new standardized approach updating the capital requirements for mortgage guarantee insurance risk. It requires more capital when house prices are high relative to borrower incomes | |
| February 10, 2016 (effective July 1, 2016) | The DOF required that portfolio-insured loans be funded only through CMHC securitization programs |
| October 3, 2016 | A consultation process with market participants on lender risk sharing was launched. The goal is to find ways to limit the federal government’s financial obligations in the event of mortgage defaults and promote prudent lending practices. |
Canada: Mortgage Credit Equation
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations in italic.
The estimation period is 1999:2-2017:2, using montly, seasonally adjusted data. Newey-West consistent variance estimator is used to calculate coefficients’ standard deviation.
Regressions I to IV estimate macroprudential measures effects after 1, 3, 6 and 9 months respectively after their implementation. Regression V estimates effects of each macroprudential measure between rounds of measures.
Canada: Mortgage Credit Equation
| Dependent variable: Mortgage credit (y/y) | I. | ||||
| House prices | 0.08 ** | ||||
| 0.03 | |||||
| Wages | 0.35 *** | ||||
| 0.10 | |||||
| Interest rate | −1.84 *** | ||||
| 0.17 | |||||
| Unemployment rate | −1.88 *** | ||||
| 0.20 | |||||
| 2008 measures | −0.56 | ||||
| 0.49 | |||||
| 2010 measures | −2.26 *** | ||||
| 0.53 | |||||
| 2011 measures | −0.94 ** | ||||
| 0.45 | |||||
| 2012 measures | −3.07 *** | ||||
| 0.29 | |||||
| 2016 measures 1/ | 0.31 | ||||
| 0.42 | |||||
| 2016 measures 2/ | −1.33 *** | ||||
| 0.38 | |||||
| Number of observations | 217 | ||||
| R2 | 0.84 | ||||
| Effectiveness of Measures 3/ | I.1 month | II. 3 months | III. 6 months | IV. 9 months | V. Between rounds |
| 2008 measures | 1.09 | 1.51 | 1.34 | 1.11 | −0.45 |
| 0.81 | 0.99 | 0.91 | 0.88 | 0.61 | |
| 2010 measures | -2.43 *** | −2.69 *** | −2.38 *** | −2.55 *** | −2.58 *** |
| 0.81 | 0.81 | 0.70 | 0.61 | 0.56 | |
| 2011 measures | −0.64 | −0.47 | −0.38 | −0.69 | −1.04 ** |
| 0.51 | 0.42 | 0.40 | 0.46 | 0.47 | |
| 2012 measures | −1.60 *** | −2.01 *** | −2.10 *** | −2.19 *** | −3.06 *** |
| 0.26 | 0.37 | 0.32 | 0.31 | 0.31 | |
| 2016 measures 1/ | 0.73 ** | 0.74 *** | 0.59 | 0.26 | 0.26 |
| 0.27 | 0.27 | 0.35 | 0.43 | 0.43 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations in italic.
The estimation period is 1999:2-2017:2, using montly, seasonally adjusted data. Newey-West consistent variance estimator is used to calculate coefficients’ standard deviation.
Regressions I to IV estimate macroprudential measures effects after 1, 3, 6 and 9 months respectively after their implementation. Regression V estimates effects of each macroprudential measure between rounds of measures.
Canada: Mortgage Credit Equation
| Dependent variable: Mortgage credit (y/y) | I. | ||||
| House prices | 0.08 ** | ||||
| 0.03 | |||||
| Wages | 0.35 *** | ||||
| 0.10 | |||||
| Interest rate | −1.84 *** | ||||
| 0.17 | |||||
| Unemployment rate | −1.88 *** | ||||
| 0.20 | |||||
| 2008 measures | −0.56 | ||||
| 0.49 | |||||
| 2010 measures | −2.26 *** | ||||
| 0.53 | |||||
| 2011 measures | −0.94 ** | ||||
| 0.45 | |||||
| 2012 measures | −3.07 *** | ||||
| 0.29 | |||||
| 2016 measures 1/ | 0.31 | ||||
| 0.42 | |||||
| 2016 measures 2/ | −1.33 *** | ||||
| 0.38 | |||||
| Number of observations | 217 | ||||
| R2 | 0.84 | ||||
| Effectiveness of Measures 3/ | I.1 month | II. 3 months | III. 6 months | IV. 9 months | V. Between rounds |
| 2008 measures | 1.09 | 1.51 | 1.34 | 1.11 | −0.45 |
| 0.81 | 0.99 | 0.91 | 0.88 | 0.61 | |
| 2010 measures | -2.43 *** | −2.69 *** | −2.38 *** | −2.55 *** | −2.58 *** |
| 0.81 | 0.81 | 0.70 | 0.61 | 0.56 | |
| 2011 measures | −0.64 | −0.47 | −0.38 | −0.69 | −1.04 ** |
| 0.51 | 0.42 | 0.40 | 0.46 | 0.47 | |
| 2012 measures | −1.60 *** | −2.01 *** | −2.10 *** | −2.19 *** | −3.06 *** |
| 0.26 | 0.37 | 0.32 | 0.31 | 0.31 | |
| 2016 measures 1/ | 0.73 ** | 0.74 *** | 0.59 | 0.26 | 0.26 |
| 0.27 | 0.27 | 0.35 | 0.43 | 0.43 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations in italic.
The estimation period is 1999:2-2017:2, using montly, seasonally adjusted data. Newey-West consistent variance estimator is used to calculate coefficients’ standard deviation.
Regressions I to IV estimate macroprudential measures effects after 1, 3, 6 and 9 months respectively after their implementation. Regression V estimates effects of each macroprudential measure between rounds of measures.
Canada: Effects of Specific Macroprudential Measures on Mortgage Growth, OLS Estimation
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level.
The estimation period is 1999:2-2017:2, using monthly seasonally adjusted data. Newey-West consistent variance estimator is used to calculate coefficients’ standard deviation. Standard deviations in italic.
All regressions include control variables as in Table A3 but are not shown here.
Canada: Effects of Specific Macroprudential Measures on Mortgage Growth, OLS Estimation
| Dependent variable: Mortgage credit (y/y) | I | II | III |
|---|---|---|---|
| Amortization period | 0.19 *** | ||
| 0.02 | |||
| LTV on refinance loans | 0.53 *** | ||
| 0.04 | |||
| LTV on first time borrowers | 0.55 *** | ||
| 0.10 | |||
| Number of observations | 217 | 217 | 217 |
| R^2 | 0.59 | 0.74 | 0.54 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level.
The estimation period is 1999:2-2017:2, using monthly seasonally adjusted data. Newey-West consistent variance estimator is used to calculate coefficients’ standard deviation. Standard deviations in italic.
All regressions include control variables as in Table A3 but are not shown here.
Canada: Effects of Specific Macroprudential Measures on Mortgage Growth, OLS Estimation
| Dependent variable: Mortgage credit (y/y) | I | II | III |
|---|---|---|---|
| Amortization period | 0.19 *** | ||
| 0.02 | |||
| LTV on refinance loans | 0.53 *** | ||
| 0.04 | |||
| LTV on first time borrowers | 0.55 *** | ||
| 0.10 | |||
| Number of observations | 217 | 217 | 217 |
| R^2 | 0.59 | 0.74 | 0.54 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level.
The estimation period is 1999:2-2017:2, using monthly seasonally adjusted data. Newey-West consistent variance estimator is used to calculate coefficients’ standard deviation. Standard deviations in italic.
All regressions include control variables as in Table A3 but are not shown here.
Canada: House Price Equation
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations in italic.
OLS estimation, period of 1999:2-2017:2. Monthly, seasonally adjusted data are used.
Newey-West consistent variance estimator is used to calculate coefficients’ standard deviation.
The dependent variable is the y-o-y change in house price index(source: CREA).
Canada: House Price Equation
| Dependent variable: House prices (y/y) | |
|---|---|
| I | |
| Mortgage credit | 0.99 *** |
| 0.18 | |
| Completed houses | −0.11 *** |
| 0.04 | |
| Existing sales | 0.10 *** |
| 0.03 | |
| GDP | 0.30* |
| 0.20 | |
| Number of observations | 217 |
| R^2 | 0.48 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations in italic.
OLS estimation, period of 1999:2-2017:2. Monthly, seasonally adjusted data are used.
Newey-West consistent variance estimator is used to calculate coefficients’ standard deviation.
The dependent variable is the y-o-y change in house price index(source: CREA).
Canada: House Price Equation
| Dependent variable: House prices (y/y) | |
|---|---|
| I | |
| Mortgage credit | 0.99 *** |
| 0.18 | |
| Completed houses | −0.11 *** |
| 0.04 | |
| Existing sales | 0.10 *** |
| 0.03 | |
| GDP | 0.30* |
| 0.20 | |
| Number of observations | 217 |
| R^2 | 0.48 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations in italic.
OLS estimation, period of 1999:2-2017:2. Monthly, seasonally adjusted data are used.
Newey-West consistent variance estimator is used to calculate coefficients’ standard deviation.
The dependent variable is the y-o-y change in house price index(source: CREA).
Effects of Macroprudential Measures on Mortgage Credit Growth-Panel GMM Estimation (2000-16)
Dependent variable: Mortgage credit growth (real)
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations are in italic.
The estimation period is 2000:1-2016:4; quarterly, seasonally adjusted data.
Data for China, India, Colombia, Romania, Lithuania, Luxembourg and Uruguay pertain to claims to private sector since mortgage credit data is unavailable.
Real mortgage credit growth is defined as the y-o-y growth rate of nominal mortgage credit deflated by CPI.
Effects of Macroprudential Measures on Mortgage Credit Growth-Panel GMM Estimation (2000-16)
Dependent variable: Mortgage credit growth (real)
| (1) | (2) | (3) | (4) | |
|---|---|---|---|---|
| Mortgage credit growth (t-1) | 090*** | 0.90*** | 0.89*** | 0.90*** |
| 0.01 | 0.01 | 0.01 | 0.01 | |
| GDP growth (t) | 0.28*** | 0.29*** | 0.28*** | 0.29*** |
| 0.04 | 0.04 | 0.04 | 0.04 | |
| Lending rates (t) | −0.12*** | −0.11** | −14*** | −0.12*** |
| 0.04 | 0.04 | 0.04 | 0.04 | |
| Risk weights | -1.99*** | |||
| 0.42 | ||||
| Provisioning | −1.06** | |||
| 0.49 | ||||
| LTV | −1.30*** | |||
| 0.25 | ||||
| DSTI | −0.87** | |||
| 0.34 | ||||
| N | 2117 | 2117 | 2117 | 2117 |
| Countries | 35 | 35 | 35 | 35 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations are in italic.
The estimation period is 2000:1-2016:4; quarterly, seasonally adjusted data.
Data for China, India, Colombia, Romania, Lithuania, Luxembourg and Uruguay pertain to claims to private sector since mortgage credit data is unavailable.
Real mortgage credit growth is defined as the y-o-y growth rate of nominal mortgage credit deflated by CPI.
Effects of Macroprudential Measures on Mortgage Credit Growth-Panel GMM Estimation (2000-16)
Dependent variable: Mortgage credit growth (real)
| (1) | (2) | (3) | (4) | |
|---|---|---|---|---|
| Mortgage credit growth (t-1) | 090*** | 0.90*** | 0.89*** | 0.90*** |
| 0.01 | 0.01 | 0.01 | 0.01 | |
| GDP growth (t) | 0.28*** | 0.29*** | 0.28*** | 0.29*** |
| 0.04 | 0.04 | 0.04 | 0.04 | |
| Lending rates (t) | −0.12*** | −0.11** | −14*** | −0.12*** |
| 0.04 | 0.04 | 0.04 | 0.04 | |
| Risk weights | -1.99*** | |||
| 0.42 | ||||
| Provisioning | −1.06** | |||
| 0.49 | ||||
| LTV | −1.30*** | |||
| 0.25 | ||||
| DSTI | −0.87** | |||
| 0.34 | ||||
| N | 2117 | 2117 | 2117 | 2117 |
| Countries | 35 | 35 | 35 | 35 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations are in italic.
The estimation period is 2000:1-2016:4; quarterly, seasonally adjusted data.
Data for China, India, Colombia, Romania, Lithuania, Luxembourg and Uruguay pertain to claims to private sector since mortgage credit data is unavailable.
Real mortgage credit growth is defined as the y-o-y growth rate of nominal mortgage credit deflated by CPI.
Effects of Macroprudential Measures on House Price Growth-Panel GMM Estimation (2000-16)
Dependent variable: House price growth (real)
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations in italic.
The estimation period is 2000:1-2016:4; quarterly, seasonally adjusted data.
Real house prices are defined as house price indices deflated by CPI (Source: OECD, GlobalProperty Guide, IMF dataset).
Effects of Macroprudential Measures on House Price Growth-Panel GMM Estimation (2000-16)
Dependent variable: House price growth (real)
| (1) | (2) | (3) | (4) | |
|---|---|---|---|---|
| House price growth (t-1) | 0.78*** | 0.78*** | 0.78*** | 0.78*** |
| 0.01 | 0.01 | 0.01 | 0.01 | |
| GDP growth (t) | 0.35*** | 0.36*** | 0.34*** | 0.34*** |
| 0.03 | 0.03 | 0.03 | 0.03 | |
| Lending rates (t) | −0.50*** | −0.48*** | −0.55*** | −0.53*** |
| 0.06 | 0.06 | 0.06 | 0.06 | |
| Risk weights | −0.14 | |||
| 0.38 | ||||
| Provisioning | 0.52 | |||
| 0.37 | ||||
| LTV | −0.38*** | |||
| 0.13 | ||||
| DSTI | −0.44** | |||
| 0.20 | ||||
| N | 1406 | 1406 | 1406 | 1406 |
| Countries | 30 | 30 | 30 | 30 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations in italic.
The estimation period is 2000:1-2016:4; quarterly, seasonally adjusted data.
Real house prices are defined as house price indices deflated by CPI (Source: OECD, GlobalProperty Guide, IMF dataset).
Effects of Macroprudential Measures on House Price Growth-Panel GMM Estimation (2000-16)
Dependent variable: House price growth (real)
| (1) | (2) | (3) | (4) | |
|---|---|---|---|---|
| House price growth (t-1) | 0.78*** | 0.78*** | 0.78*** | 0.78*** |
| 0.01 | 0.01 | 0.01 | 0.01 | |
| GDP growth (t) | 0.35*** | 0.36*** | 0.34*** | 0.34*** |
| 0.03 | 0.03 | 0.03 | 0.03 | |
| Lending rates (t) | −0.50*** | −0.48*** | −0.55*** | −0.53*** |
| 0.06 | 0.06 | 0.06 | 0.06 | |
| Risk weights | −0.14 | |||
| 0.38 | ||||
| Provisioning | 0.52 | |||
| 0.37 | ||||
| LTV | −0.38*** | |||
| 0.13 | ||||
| DSTI | −0.44** | |||
| 0.20 | ||||
| N | 1406 | 1406 | 1406 | 1406 |
| Countries | 30 | 30 | 30 | 30 |
*,**,*** indicate respectively statistical significance at the 10, 5, and 1 percent level. Standard deviations in italic.
The estimation period is 2000:1-2016:4; quarterly, seasonally adjusted data.
Real house prices are defined as house price indices deflated by CPI (Source: OECD, GlobalProperty Guide, IMF dataset).
References
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Prepared by Ivo Krznar, Zsofia Arvai (both MCM), and Yulia Ustyugova (WHD).
In Ontario, provincially-regulated credit unions are also required to have mortgage insurance in cases where the LTV exceeds 80 percent. Mortgages with LTV ratios of 80 percent or below (“low LTV” or low-ratio mortgages) may also be insured on a portfolio basis.
CMHC captures close to 65 percent of outstanding insured mortgage debt.
In 2014, CMHC increased its mortgage loan insurance premiums by approximately 15 percent for homeowners and 1-4 unit rental properties which raised monthly mortgage payment by approximately $5. In 2015, mortgage loan insurance premiums for homebuyers with less than a 10% down payment increased by approximately 15%, resulting in additional increase of approximately $5 to their monthly mortgage payment.
The results of the model estimated using SUR or 3SLS estimators are consistent with the results of the model estimated using OLS estimator.
Source: Canada Mortgage and Housing Corporation, conventional mortgage lending rate, five year term.
Given that the annual mortgage credit growth rate is regressed on monthly data, the estimated effect of macroprudential measures could be muted on impact and increase overtime,
This follows Peterson and Zheng (2011). Igan and Kang (2011) also use similar specifications for Korea.
The government set a minimum down payment of 5 percent for insured loans, but “cash backs,” unsecured borrowing and gifts could have been considered part of the down payment.
CMHC (2011) suggested that the volume of refinance loans dropped by 22 percent following the 2011 measures. Dunning (2012) estimated that the 2011 measures would push debt-service ratios above the maximum limit for about 6 percent of the high LTV mortgages taken out during 2010. He also suggested that about 11 percent of the borrowers in 2011 would have not been able to access credit following the latest reduction of the maximum amortization period.
OSFI’s B-20 guideline stipulates that banks should make reasonable efforts to determine if down payment is sourced from the borrower’s own resources or savings. CMHC (2012a) indicates that 35 percent of households who purchased a house in 2011 were first-time borrowers and about 15 percent of them borrowed at least part of the down payment.
Dunning (2015) suggests that only a small minority of home buyers (2 percent) and mortgage borrowers were affected and for most of them the additional required down payments were relatively insubstantial.
Using loan-level administrative data and household survey data for 2005-10, Allen et al. (2017) find that policies targeting the loan-to-value ratio have a larger impact on demand than policies targeting the debt-service ratio, such as amortization.
See Lim et all (2011), Crowe et al. (2011), Akinci and Olmstead-Rumsey (2015), Almeida, Campello and Liu (2005), Wong et al. (2011), Ahuja and Nabar (2011), Igan and Kang (2011), IMF (2011), Arregui and others (2013), Kuttner and Shim (2014), Hallissey and others (2014), Vandenbussche, Vogel, and Detragiache (2012) for more detailed discussion on implementation and evidence of instruments’ effectiveness.
The regressions broadly follow the approach in Arregui and others (2013).
Given the challenges associated with finding valid instruments, we also estimated the same specifications using fixed effects models that produced generally consistent results (except for the coefficient for provisioning that lost significance in the mortgage credit growth equation).
