Just over ten years ago the common wisdom among Canadian policy makers was that extending the supply of credit to households was a great idea - which in part led @CMHC_ca to increase the maximum amortization on mortgages from 25 years to 40 years in under a year 1/
Today, the economic thinking driving policy decisions is the exact opposite - that fueling your economy by increasing the supply of credit to households is not such a great idea - thanks in part to research by @profsufi and @AtifRMian 2/
In the span of 10 years Canada has gone from 40 year amortization mortgages to 25 year ams + a 200 bp stress test - not to mention rates are the highest they've been in 10 years. When you make such dramatic changes to lending policies, there are going to be consequences 3/
We are seeing these consequences today - a big shift to private lenders because existing homeowners no longer qualify under today's tighter rules. As a result, they are paying much higher rates for their debt, spending less, saving less etc. 4/
While stress tests are a step forward, you can't correct the mistakes of the past overnight - which is what policy makers are trying to do. My instinct is that if the housing market in Canada continues to cool in 2019, we will likely see the stress tests pulled back to 100 bp 5/
In a soft housing market and a cool economy, out of all the tools available to policy makers to stimulate the economy, reducing the stress tests to 100 bp appears to be a relatively easy choice. But hopefully such a policy change isn't even needed /
