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The Economy Is Down. Why Are Home Prices Up?

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Many Americans will have heard stories about people fearful of the pandemic fleeing from crowded cities and driving up home prices in the rest of the country. But there is a much bigger tale to tell here.

Housing prices started rising before the pandemic arrived. They are rising on average in U.S. cities as well as in rural and suburban areas. They are increasing not just in the United States but also worldwide, regardless of how hard a country has been hit by the pandemic. And prices are at or near record highs not only for housing but also, despite recent market wobbles, for stocks and bonds.

This is a global market boom in the price of … everything.

The common factor is not the virus; it is so-called easy money. Led by the Federal Reserve in the United States, central banks have been lowering interest rates for decades, hoping to stimulate economic growth, but much of that newly issued money keeps flowing into financial markets. This unintended boost has accelerated drastically during the pandemic, as central banks roll out multi-trillion-dollar stimulus plans. According to my research, the valuations of stocks, bonds and housing have risen sharply this year to levels seen only around 2000 and 2008 — periods characterized by financial bubbles.

This is not good news for most people. Market manias have an alarming record of bringing down the wider economy and of widening wealth inequality. In 484 cities around the world whose home prices are tracked by Numbeo, which compiles user-generated data about consumer prices, home prices are now beyond reach for the typical family in more than 400 of them. The least affordable U.S. city is New York, where median home prices (despite falling during the pandemic) are still more than 10 times the median annual income.

Going back at least to the 1970s, housing had always slumped during recessions, both in the United States and worldwide. People lose jobs and stop dreaming of bigger homes. But in the second quarter this year, amid the worst global recession since the 1940s, housing prices were up a robust 4 percent worldwide, and that was before the boom really took off. Since May, new-home sales in the United States have climbed by 67 percent, and prices by 15 percent. The median price of existing homes in the United States recently passed $300,000 for the first time.

This surreal “boom in the gloom” is a government creation. As central banks flooded money into the credit markets, rates on 30-year mortgages, which had been falling for years, plummeted to record lows — under 3 percent in the United States and under 2 percent in Europe. If you are dreaming of riding out the pandemic in a larger home, cheap mortgages now beckon you to act.

For now, housing is a bright spot in a struggling economy. But when prices are shaped by easy money, as much or more than by genuine demand, the result is often a severely skewed allocation of resources. Already, many investors are buying homes not as a shelter but as an alternative to stocks and bonds, which are even pricier.

The risk going forward is that the boom will leave more people unable to afford a home and that prices will eventually reach dangerous bubble levels. And when booms go bust, it takes time to unravel the bad debts, which ripple through the middle class, lengthening and deepening the resulting recession.

The response favored by many experts, including some Fed officials, is tighter regulation. But if regulators clamp down on mortgage lending, investors will borrow to buy something else — stocks and bonds, or even fine art, rare wines or some other exotic asset. When borrowing is nearly free, tweaking regulations will only shift money from one market to another.

For years, central banks said there was no reason to tighten monetary policy because there was no inflation. But as many economists have argued, there appeared to be no inflation because official indexes don’t adequately capture asset prices. The United States, for example, includes only rent and a “rental equivalent” for home prices in its official indexes, which makes them increasingly misleading: Rents have lagged behind home prices for years and have slumped further during the pandemic, pushing the official inflation rate even lower.

Central banks need to take the menace of asset price inflation more seriously and to give the threat of stock, bond and especially housing bubbles more weight in their policy deliberations. This would not prevent central banks from bailing out an economy in crisis, when other concerns prevail. But once a recovery begins, it would nudge central bankers to start shutting off the easy money spigot a bit earlier than they otherwise would have — before an “everything boom” like this one becomes a full-blown bubble.

Ruchir Sharma is the chief global strategist at Morgan Stanley Investment Management, the author, most recently, of “The Ten Rules of Successful Nations” and a contributing opinion writer. This essay reflects his opinions alone.

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G7 nations to boost climate finance

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G7 leaders agreed on Sunday to raise their contributions to meet an overdue spending pledge of $100 billion a year by rich countries to help poorer countries cut carbon emissions and cope with global warming, but only two nations offered firm promises of more cash.

Alongside plans billed as helping speed infrastructure funding in developing countries and a shift to renewable and sustainable technology, the world’s seven largest advanced economies again pledged to meet the climate finance target.

But climate groups said the promise made in the summit’s final communique lacked detail and the developed nations should be more ambitious in their financial commitments.

In the communique, the seven nations – the United States, Britain, Canada, France, Germany, Italy and Japan – reaffirmed their commitment to “jointly mobilise $100 billion per year from public and private sources, through to 2025”.

“Towards this end, we commit to each increase and improve our overall international public climate finance contributions for this period and call on other developed countries to join and enhance their contributions to this effort.”

After the summit concluded, Canada said it would double its climate finance pledge to C$5.3 billion ($4.4 billion) over the next five years and Germany would increase its by 2 billion to 6 billion euros ($7.26 billion) a year by 2025 at the latest.

There was a clear push by leaders at the summit in southwest England to try to counter China’s increasing influence in the world, particularly among developing nations. The leaders signalled their desire to build a rival to Beijing’s multi-trillion-dollar Belt and Road initiative but the details were few and far between.

Johnson, host of the gathering in Carbis Bay, told a news conference that developed nations had to move further, faster.

“G7 countries account for 20% of global carbon emissions, and we were clear this weekend that action has to start with us,” he said as the summit concluded.

“And while it’s fantastic that every one of the G7 countries has pledged to wipe out our contributions to climate change, we need to make sure we’re achieving that as fast as we can and helping developing countries at the same time.”

PLEDGE OVERDUE

Some green groups were unimpressed with the climate pledges.

Catherine Pettengell, director at Climate Action Network, an umbrella group for advocacy organisations, said the G7 had failed to rise to the challenge of agreeing on concrete commitments on climate finance.

“We had hoped that the leaders of the world’s richest nations would come away from this week having put their money their mouth is,” she said.

Developed countries agreed at the United Nations in 2009 to together contribute $100 billion each year by 2020 in climate finance to poorer countries, many of whom are grappling with rising seas, storms and droughts made worse by climate change.

That target was not met, derailed in part by the coronavirus pandemic that also forced Britain to postpone the U.N. Climate Change Conference (COP26) until later this year.

The G7 also said 2021 should be a “turning point for our planet” and to accelerate efforts to cut greenhouse gas emissions and keep the 1.5 Celsius global warming threshold within reach.

European Commission President Ursula von der Leyen said the G7 leaders had agreed to phase out coal.

The communique seemed less clear, saying: “We have committed to rapidly scale-up technologies and policies that further accelerate the transition away from unabated coal capacity, consistent with our 2030 NDCs and net zero commitment.”

The also pledged to work together to tackle so-called carbon leakage – the risk that tough climate policies could cause companies to relocate to regions where they can continue to pollute cheaply.

But there were few details on how they would manage to cut emissions, with an absence of specific measures on everything from the phasing out of coal to moving to electric vehicles.

Pettengell said it was encouraging that leaders were recognising the importance of climate change but their words had to be backed up by specific action on cutting subsidies for fossil fuel development and ending investment in projects such as new oil and gas fields, as well as on climate finance.

British environmentalist David Attenborough appealed to politicians to take action.

“We know in detail what is happening to our planet, and we know many of the things we need to do during this decade,” he said in a recorded video address to the meeting.

“Tackling climate change is now as much a political and communications challenge as it is a scientific or technological one. We have the skills to address it in time, all we need is the global will to do so.”

($1 = 1.2153 Canadian dollars)

(Reporting by Elizabeth PiperAdditional reporting by William James and Kate Abnett in Brussels and Andreas Rinke in BerlinEditing by William Maclean, Raissa Kasolowsky and Frances Kerry)

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Canadian dollar goes up from Friday’s 4-week low

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Canadian dollar

The Canadian dollar edged higher against its U.S. counterpart on Monday as oil prices climbed and investors looked past domestic data showing factory sales falling in April, with the loonie clawing back some of Friday’s decline.

Canadian factory sales decreased by 2.1% in April from March, Statistics Canada said. Still, sales were up 1.1% after excluding vehicles and parts.

“Zooming out from the disruptions seen in the auto industry, the outlook for manufacturing sales is not all that bad,” Omar Abdelrahman, an economist at TD Economics, said in a note.

“The reopening of provincial economies and strength in Canada‘s largest export market (the U.S.) should provide a lift to demand,” Abdelrahman added.

The price of oil, one of Canada‘s major exports, was supported by economic recovery.

U.S. crude prices rose 0.9% to $71.56 a barrel, while the Canadian dollar was trading 0.2% higher at 1.2143 to the greenback, or 82.35 U.S. cents. On Friday, it fell to its weakest since May 14 at 1.2177.

Speculators have cut their bullish bets on the Canadian dollar, the strongest G10 currency this year, data from the U.S. Commodity Futures Trading Commission showed on Friday. As of June 8, net long positions had fallen to 45,281 contracts from 48,772 in the prior week.

A stronger Canadian dollar is usually seen hurting exporters, but the nature of the global economic recovery could help firms pass on their higher costs from the currency to customers, leaving exporters in less pain than in previous cycles.

Investors were awaiting a Federal Reserve policy announcement on Wednesday. Expectations that the Fed would stick to its dovish course have helped cap U.S. and Canadian bond yields.

Canada‘s 10-year yield touched its lowest level since March 3 at 1.365% before recovering to 1.381%, up 1.3 basis points on the day.

 

(Reporting by Fergal Smith; Editing by Bernadette Baum)

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Economy

Toronto stock exchange dips as losses in miners

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Toronto Stock Exchange

Toronto stock exchange index edged lower on Monday, as losses in mining stocks and dismal domestic manufacturing data overshadowed gains in energy stocks.

* The materials sector, which includes precious and base metals miners and fertilizer companies, lost 0.7% as gold futures fell 1.6% to $1,848.2 an ounce. [GOL/]

* Canadian factory sales slipped by 2.1% in April from March on lower sales of transportation equipment, as well as subdued petroleum and coal products sector, Statistics Canada said.

* At 9:43 a.m. ET (13:43 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was down 14.52 points, or 0.07%, at 20,123.83.

* The energy sector climbed 1.4% as U.S. crude prices were up 1% a barrel, while Brent crude rose 0.9%. [O/R]

* Financials slipped 0.3%, while industrials fell 0.1%.

* On the TSX, 120 issues were higher, while 107 issues declined for a 1.12-to-1 ratio favouring gainers, with a trading volume of 22.35 million shares.

* TSX’s top gainers were paper and packaging company Cascades Inc <CAS.TO> and IT firm Kinaxis Inc <KXS.TO>, jumping 4.1% and 4.0%, respectively.

* Biggest decliners were uranium producers Nexgen Energy Ltd <NXE.TO>, down 5.9%, followed by Cameco Corp falling 5.5%.

* The most heavily traded shares by volume were Canadian Natural Resources Limited <CNQ.TO>, BCE Inc <BCE.TO>, and Hut 8 Mining Corp <HUT.TO>

* Twenty-two stocks hit fresh 52-week highs on the TSX, while there were no new lows.

* Across all Canadian issues, there were 95 new 52-week highs and four new lows, with total volume of 43.57 million shares.

 

(Reporting by Amal S in Bengaluru; Editing by Rashmi Aich)

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