Munich Personal RePEc Archive

Do Loan-to-Value Ratio Regulation Changes Affect Canadian Mortgage Credit?

Kronick, Jeremy (2015): Do Loan-to-Value Ratio Regulation Changes Affect Canadian Mortgage Credit?

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Abstract

ABSTRACT: This paper investigates the relationship in the Canadian housing market between loan-to-value (“LTV”) ratios and residential mortgage credit over the 1981-2012 time period. More specifically, I look to determine whether LTV ratio regulation provides a mechanism with which to slow down the potentially overheated Canadian housing market. Due to the endogeneity of many macroeconomic variables, I use a structural vector autoregression (“SVAR”) to investigate this question. Results indicate that three of the four major LTV regulation changes that occurred during this timeframe either had insignificant effects on mortgage credit, or caused it to move contrary to expectations. Only the 2008 tightening of LTV was weakly significant. Therefore, regulation changes to LTV ratios are unlikely to be successful in slowing down the overheated housing market in Canada, which may force central bankers to use broader monetary policy or other forms of macroprudential regulation.

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