and Financial Stability CMHC National Housing Conference 22 - - PowerPoint PPT Presentation

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Balancing Act: the Link between Monetary Policy and Financial Stability

Carolyn A. Wilkins

Senior Deputy Governor Bank of Canada

CMHC National Housing Conference 22 November 2018

Prudential, social and other objectives Monetary Policy

Monetary and macro-prudential policies work best when they work together

Mortgage Finance and Housing Policies Inflation control

Support stability of the financial system

Loan-to-income ratios in Greater T

• ronto Area

2013

Average loan-to-income ratio of new high-ratio mortgages, by Forward Sortation Area (FSA)

Loan-to-income ratios in Greater T

• ronto Area

2014

Average loan-to-income ratio of new high-ratio mortgages, by Forward Sortation Area (FSA)

Loan-to-income ratios in Greater T

• ronto Area

2015

Average loan-to-income ratio of new high-ratio mortgages, by Forward Sortation Area (FSA)

Loan-to-income ratios in Greater T

• ronto Area

2016

Average loan-to-income ratio of new high-ratio mortgages, by Forward Sortation Area (FSA)

Loan-to-income ratios in Greater T

• ronto Area

2017

Average loan-to-income ratio of new high-ratio mortgages, by Forward Sortation Area (FSA)

Policy measures have improved the quality of new mortgages…

5 10 15 20 25 30 2 3 4 2014 2015 2016 2017 2018

Share of new mortgages with a loan-to-income ratio over 450 per cent; 5-year mortgage rate

5-yr mortgage rate (right scale) Insured mortgages Uninsured mortgages (left scale) Rules tightened for insured mortgages Rules tightened for uninsured mortgages (Guideline B-20 revised)

% %

Greater Vancouver Area (GVA)

15% non- resident tax in GVA GVA tax increased to 20%

Greater Toronto Area (GTA)

15% non- resident tax in GTA

Canada

Revised Guideline B-20

• 10
• 5

5 10 15 20 25 30 35 2015 2016 2017 2018

%

Year-on-year percentage change in quality adjusted benchmark house prices

…and have slowed the housing market to a more sustainable pace

Housing affordability is on a better track than it might have been

0.20 0.25 0.30 0.35 0.40 0.45 0.50 2001 2003 2005 2007 2009 2011 2013 2015 2017

Average cost of servicing a new mortgage, as a share of disposable income1

Ratio

Less affordable More affordable Housing Affordability Index Counterfactual if house price growth had remained at its peak (all else equal)

• 1. https://credit.bankofcanada.ca/financialindicators/hai

Example of how Bank assesses micro effects of interest rate increases

38% 22% 18% 22% 5 10 15 20 25 30 35 2015 Origination 2020 Renewal % Loan–to–income ratio below 250% Loan–to–income ratio between 250% and 350% Loan–to–income ratio between 350% and 450% Loan–to–income ratio above 450%

From origination in 2015 to renewal in 2020

Annual mortgage payments as a percentage of annual income for 5-year fixed-rate mortgages, at different household indebtedness levels at origination

Research to inform macro- prudential policy framework

• Work with partners to strengthen operations
• On setting clear objectives, anything to learn from

inflation-targeting framework?

• How well do macro-prudential tools work at achieving the

desired effects, and for how long?

• Design questions for macro-prudential policies
• Structural or countercyclical? Rules-based or discretionary?
• Can macro-prudential policies address time-inconsistency?

Governance?

• Optimal policy mix
• Best modeling strategy to map policy interactions?
• How can authorities with clear and independent

mandates coordinate effectively?