Macroprudential policies help contain housing market’s risks, says Bank of Canada
Effective and reliable macroprudential policies are proving to be efficient in mitigating the risks of booming housing markets that could otherwise spark a crisis for Canadians, Australians and people of other similar economies.
Bank of Canada Deputy Governor Lawrence Schembri said on Tuesday that risks involved in the country’s growing housing market were well contained by policies relating to stricter home loan rules, which are specifically designed to prevent banks from getting involved in riskier loans.
While the housing boom has had the Bank of Canada and Canadian government worried that household imbalances, record levels of personal indebtedness and a strong housing market would eventually push Canada into a crisis, particularly if interest rates moved upwards, Schembri said complementary macroprudential policies have controlled the risks associated with this instability.
Considering economies like Canada, Australia, Sweden, New Zealand and Norway, Schembri noted that the fall in interest rates following the 2008 recession had boosted the housing sector.
"The experience in these countries therefore suggests that macroprudential policies that address structural weaknesses in the regulatory framework are best suited for mitigating such financial vulnerabilities," he added.
Canadian authorities have implemented stricter mortgage rules four times between 2008 to 2012. This has cut down the maximum amortisation of insured mortgages and made changes to the qualifying rules.
"Recent evidence suggests that these measures have resulted in higher average credit scores, which have improved the quality of mortgage borrowing," said Schembri.
The central bank in Canada is expecting the housing market to cool in 2015 and stabilise over the next two years, but persistent strength could result in further household sector imbalances. In other words, the bank is anticipating a “constructive evolution in the housing market”.
In the central bank’s Financial System Review in June, it acknowledged that higher house prices meant greater the levels of household debt . It also said homeowners could face severe losses if properties failed to gain enough value.
"The likely trigger for both vulnerabilities would be a major global shock that generated a sharp increase in unemployment and possibly in interest rates as well," said Schembri.
Home prices are surging in Canada and other comparable economies for about 20 years and the increase can be attributed to demographic forces as well as lower interest rates. Structural transformation in mortgage financing and constraints on supply , especially in urban areas, have also contributed to the rise of housing prices.
Danger with Australia’s housing boom
Canada’s housing boom is a tale Australians can relate to. In June, the Reserve Bank of Australia issued a statement claiming Sydney’s housing market was undoubtedly in a bubble. Some economists have also made predictions along similar lines, saying that a "bloodbath" would occur when that bubble bursts.
In present housing conditions, the threat stems from residential property investors, who might not be able to keep up with borrowing costs as rental income growth slows, even if interest rates are decreased to a historic low. Instead, they are counting on long term capital growth to offset the rental shortfall in the short term.
It has been said that if there is to be another recession in Australia, it is likely to result from falling house prices .
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