Assessment of the Effects of Macroprudential Tightening in Canada

During the period of 2008 to 2012, the rules for government-backed mortgage insurance were tightened on four occasions. In this note, we estimate the effects through a simple econometric exercise using a vector error-correction model (VECM). Both a descriptive analysis of the raw data and an event-study analysis based on the output from the VECM suggest that while the tightening of the mortgage rules contributed to slower growth of both credit and residential investment, the effects were not always immediate. In some episodes, a tightening was followed by a temporary increase in residential mortgage credit growth (a finding that persists even after controlling for other events in the economy), possibly in anticipation of additional tightenings. In the long run, however, the residential mortgage growth rate was reduced. The consequences of rule changes were more persistent for residential mortgage growth than for the more volatile residential investment growth.