Balancing Act: the Link between Monetary Policy and Financial Stability CMHC National Housing Conference 22 November 2018 Carolyn A. Wilkins Senior Deputy Governor Bank of Canada bank-banque-canada.ca
Monetary and macro-prudential policies work best when they work together Mortgage Monetary Finance and Policy Housing Policies Prudential, social Inflation control and other objectives Support stability of the financial system
Loan-to-income ratios in Greater T oronto Area 2013 Average loan-to-income ratio of new high-ratio mortgages, by Forward Sortation Area (FSA)
Loan-to-income ratios in Greater T oronto Area 2014 Average loan-to-income ratio of new high-ratio mortgages, by Forward Sortation Area (FSA)
Loan-to-income ratios in Greater T oronto Area 2015 Average loan-to-income ratio of new high-ratio mortgages, by Forward Sortation Area (FSA)
Loan-to-income ratios in Greater T oronto Area 2016 Average loan-to-income ratio of new high-ratio mortgages, by Forward Sortation Area (FSA)
Loan-to-income ratios in Greater T oronto 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… Share of new mortgages with a loan-to-income ratio over 450 per cent; 5-year mortgage rate % % 30 4 Rules tightened for insured mortgages Rules tightened for uninsured mortgages (Guideline B-20 revised) 25 20 15 3 10 5 0 2 2014 2015 2016 2017 2018 5-yr mortgage rate (right scale) Insured mortgages Uninsured mortgages (left scale)
…and have slowed the housing market to a more sustainable pace Year-on-year percentage change in quality adjusted benchmark house prices % 35 Revised 15% non- Guideline B-20 resident tax 30 15% non- in GTA resident tax in GVA 25 Greater Vancouver Area (GVA) GVA tax 20 increased to 20% Greater Toronto Area (GTA) 15 10 Canada 5 0 -5 -10 2015 2016 2017 2018
Housing affordability is on a better track than it might have been Average cost of servicing a new mortgage, as a share of disposable income 1 Ratio 0.50 Less affordable Counterfactual if house price growth had 0.45 remained at its peak (all else equal) Housing Affordability Index 0.40 0.35 More affordable 0.30 0.25 0.20 2001 2003 2005 2007 2009 2011 2013 2015 2017 1. https://credit.bankofcanada.ca/financialindicators/hai
Example of how Bank assesses micro effects of interest rate increases Annual mortgage payments as a percentage of annual income for 5-year fixed-rate mortgages, at different household indebtedness levels at origination % From origination in 2015 to renewal in 2020 35 22% 30 25 18% 20 22% 15 38% 10 5 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%
• 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 Research to desired effects, and for how long? inform macro- • Design questions for macro-prudential policies • Structural or countercyclical? Rules-based or discretionary? prudential policy • Can macro-prudential policies address time-inconsistency? Governance? framework • Optimal policy mix • Best modeling strategy to map policy interactions? • How can authorities with clear and independent mandates coordinate effectively?
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