Balancing Financial Stability and Housing Affordability: The Case of Canada

Troy Matheson ()

No 2018/237, IMF Working Papers from International Monetary Fund

Abstract: Housing market imbalances are a key source of systemic risk and can adversely affect housing affordability. This paper utilizes a stylized model of the Canadian economy that includes policymakers with differing objectives—macroeconomic stability, financial stability, and housing affordability. Not surprisingly, when faced with multiple objectives, deploying more policy instruments can lead to better outcomes. The results show that macroprudential policy can be more effective than policies based on adjusting propertytransfer taxes because property-tax policy entails excessive volatility in tax rates. They also show that if property-transfer taxes are used as a policy instrument, taxes targeted at a broader-set of homebuyers can be more effective than measures targeted at a smaller subset of homebuyers, such as nonresident homebuyers.

Keywords: WP; DSGE model; Housing; Macroprudential Policy; Canada; housing affordability; preference shock; LTV ratio; consumption index; consumer goods; LTV policy; affordability concern; cost-push shock; housing preference shock; housing market imbalance; Consumption; Transaction tax; Housing prices (search for similar items in EconPapers)
Pages: 21
Date: 2018-11-02
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