Bank of Canada suggests a higher percentage of down payment?

The latest Bank of Canada Review — Summer 2011 special issue: Real-Financial Linkage, is just released.

The article “Mortgage Debt and Pro-cyclicality in the Housing Market” catches our attention. The findings could suggest a lower LTV to fight against procyclicality in the housing market, which is an important ingredient in the emergence of booms and busts.

• Research from a number of countries suggests that the setting of the maximum limit on the loan-to-value (LTV) ratio on a residential mortgage could help to moderate procyclical movements in house prices and housing market activity
• Models developed at the Bank of Canada and elsewhere allow researchers to examine the link between the level of the LTV ratio and the degree of procyclicality in the housing market. They demonstrate that an LTV ratio set at a lower level would dampen procyclicality. Varying the LTV ratio for mortgages countercyclically could mitigate procyclicality even further.