Box B: Recent macro-prudential actions in advanced economies

This page contains information on recent macro-prudential actions in advanced economies from the May 2013 Financial Stability Report.

Authorities in countries including Canada, Israel, Norway, Sweden, and Switzerland have applied macroprudential tools in recent years to counter risks associated with increasing house prices and household debt. House prices in these economies have continued to grow at relatively elevated rates after the global financial crisis (figure 3.8), supported by relatively strong economic growth. Housing activity has also been underpinned by the low global interest rate environment and cuts in policy interest rates, both of which contributed to low mortgage interest rates and a decline in household interest-servicing ratios (figure B1(a)).

Figure B1(a): Debt indicators for selected advanced economies - Household interest servicing (percent of disposable income)

Figure B1a Debt indicators for selected advanced economies: Household interest servicing (percent of disposable income)

Source: Haver, RBNZ, Bank of Canada, Riksbank, and Norges Bank.

Buoyant housing market conditions in recent years came on top of a rapid pre-crisis run-up in house prices and household debt relative to income in Canada, Norway and Sweden (figure B1(b)). Public comments by the various authorities suggest concern about these preexisting vulnerabilities, which helps to explain why macroprudential measures were imposed even though credit growth had slowed (figure B1(c)) and credit-to-GDP was less elevated relative to trend (figure B1(d)). In contrast, house prices and household debt were relatively stable in the years before the crisis in Switzerland and Israel, but increased rapidly in recent years.

Figure B1(b): Debt indicators for selected advanced economies - Household debt (percent of disposable income)

Figure B1b Debt indicators for selected advanced economies: Household debt (percent of disposable income)

Source: Haver, RBNZ, Bank of Canada, Riksbank, and Norges Bank.

Figure B1(c): Debt indicators for selected advanced economies - Household credit growth (annual percent change)

Figure B1c Debt indicators for selected advanced economies: Household credit growth (annual percent change)

Source: Haver, RBNZ, Bank of Canada, Riksbank, and Norges Bank.

Figure B1(d): Debt indicators for selected advanced economies - Credit-to-GDP gap (percentage point deviation from trend)

Figure B1d Debt indicators for selected advanced economies: Credit-to-GDP gap (percentage point deviation from trend)

Source: Haver, RBNZ, Bank of Canada, Riksbank, and Norges Bank.

The details of the policy response varied significantly across economies. Norway, Sweden, Israel and Canada all imposed some form of loan-to-value ratio (LVR) restrictions, but with different features to suit the circumstances of their respective economies. For example, maximum LVR ratios of 85 percent were introduced in Norway and Sweden while in Israel, where high-LVR lending is less prevalent, LVR ratios were capped at 75 percent for first-time buyers and 50 percent for investors. In Canada, the Government plays a dominant role in insuring mortgages and the policy response involved a tightening of the conditions required to qualify for this insurance. This included a reduction in the allowable LVR to 80 percent for mortgage refinancing or for investment properties, and a reduction in the maximum allowable mortgage term to 25 years. Switzerland has taken a different approach with the recent announcement of a macro-prudential capital buffer applying to banks’ housing exposures. While the tools have only recently been implemented, authorities in Sweden and Canada have cited the macro-prudential restrictions as one of the factors behind more recent slowdowns in household credit and house prices.