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Economy

The housing boom, central banks and the inflation conundrum

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By Sujata Rao

LONDON (Reuters) -A multi-year boom in global house prices which even a pandemic has failed to halt is forcing central banks around the world to confront a knotty question – what, if anything, should they be doing about it?

The surge in property values from Australia to Sweden is often viewed benignly by governments as creating wealth. But history also shows the risk of de-stabilising bubbles and the high social cost as millions find home ownership unaffordable.

The irony is that while the cheap money created by low or negative interest rates has driven the price rises, they barely figure in central banks’ calculations of inflation, one of the key drivers of their monetary policy.

While housing costs, whether rent or home repairs, are assigned varying weights in inflation indices ranging from 40%-plus in the United States to 6.5% in the euro zone, house prices themselves are left out. As they spiral higher and higher, many argue this is no longer tenable.

“The debate of whether we actually are reflecting inflation properly will come up more and more. House prices will start getting a lot of attention,” said Manoj Pradhan, co-author of a book called The Great Demographic Reversal, which predicts a global inflation resurgence in coming years.

Global residential property prices have risen 60% in the past 10 years, according to a Knight Frank index. In 2020, even as COVID-19 choked the world economy, they climbed an average 5.6%, with 20%-30% jumps in some markets.

While low interest rates have long been the main driver of the rally, existing government subsidies for home ownership and more recently pandemic-era support such as suspending property taxes have been factors too.

Many of these one-off support measures will start to be wound down, but governments often fight shy of politically tricky measures to keep a lid more firmly on prices, such as banning multiple property ownership or easing building regulations.

That raises the question of what central banks can do.

FIRST SALVO

New Zealand’s government fired the first salvo in February when it told its central bank to consider the impact of interest rates on house prices, which soared 23% last year.

Others are considering the question too. European Central Bank President Christine Lagarde said last week that measuring housing’s role in the rising cost of living had emerged as a key point in a strategic policy review due to be unveiled this year.

If real inflation is higher than the official consumer price index is measuring, it could imply that central bank or government policies are more expansionary than they should be.

“If housing does not signal inflation via the CPI, then the economy is more likely to run hot, and what you get over time is generalised inflation pressures,” Pradhan said.

At present rental inflation is subdued due to pandemic hardship, or because low interest rates and remote working are encouraging home-buying.

Morgan Stanley’s chief cross-asset strategist Andrew Sheets said this may be giving a misleading signal. “The rental market will be weak and the housing market will be strong and that (rental weakness) could show up as a disinflationary force.”

There are strong arguments for excluding headline shifts in house prices from inflation indexes. Housing is, for most people a lifetime purchase rather than an ongoing expense, which they are designed to gauge.

Including house prices in the inflation measures central banks use to guide policy is also widely seen as impractical, given their extreme volatility.

More central banks may however consider adapting inflation indices to include a measure of the costs associated with living in one’s own home, such as maintenance and home improvements.

At present, inflation measures used by the Fed, the Bank of Japan, New Zealand and Australia include so-called owner-occupier costs. But the gauge employed by the Bank of England does not, and they are also not factored into the main inflation measure used by the ECB.

The ECB has argued for their inclusion, but collecting timely data from 19 countries and differing home ownership levels across the bloc would complicate the task.

Crucially, economists believe including these costs might have lifted euro zone inflation by 0.2 to 0.3 percentage points, taking the ECB nearer its elusive inflation target of close to 2%.

LONG-DORMANT INFLATION

Ultimately, such policymaking shifts may be risky amid uncertainty created by the pandemic.

Adding property prices to CPI indexes just as long-dormant inflation finally awakes could send readings soaring, heaping pressure on central banks to tighten policy even as economies nurse pandemic-time wounds.

Some analysts, such as at ING Bank, predict that with some exceptions housing rallies may anyway start to cool as support measures introduced during the pandemic are unwound.

Voters’ anger may even goad governments into slugging property investors with higher taxes – as New Zealand did at the end of March.

Those who argue against extending central bank remits further into housing say tighter policy could even exacerbate the problem by crimping property supply.

George Washington University professor Danny Leipziger argues housing markets are more effectively cooled by regulation and measures outside central banks’ scope, such as raising capital gains taxes and increasing the supply of housing.

“I have no problem with the ECB adding rental or home-owners’ costs to its basket,” Leipziger said. “But if I am concerned about house prices in Berlin or Madrid, asking the ECB to deal with it is not the right way.”

(Additional reporting by Dhara Ranasinghe and David Milliken; Editing by Mark John and Jan Harvey)

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Canada posts hefty job losses in April as third wave bites

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By Julie Gordon

OTTAWA (Reuters) –Canada lost more jobs than expected in April as fresh restrictions to contain a variant-driven third wave of COVID-19 weighed on employers, Statistics Canada data showed on Friday.

Some 207,100 jobs were lost in April, more than the average analyst prediction for a loss of 175,000. The unemployment rate climbed to 8.1%, missing analyst expectations of 7.8%. Employment is now 2.6% below pre-pandemic levels.

“This episode seemed to be a little more impactful in that it led to a big decline in full-time jobs and specifically in private-sector employment,” said Doug Porter, chief economist at BMO Capital Markets.

“There were some heavy hits in education and culture and recreation. So it seems like the third wave bit into other sectors a little bit more deeply than the second wave.”

Full-time employment was down by 129,400 while part-time employment fell by 77,800 positions.

With many retailers shuttered in April and the restrictions also hitting hotels, food services and entertainment, service sector employment plunged by 195,400 jobs. Employment in the goods sector fell by 11,800.

As COVID-19 infections surged in April, a number of Canadian provinces imposed fresh restrictions, including shuttering or limiting non-essential businesses and closing schools. Cases are beginning to decline, but reopening is still weeks away and economists expect further job losses in May.

Canada has so far fully vaccinated just over 3% of its nearly 38 million residents, while more than 36% have received a first dose. By the end of June, Canada expects to have received 40 million doses.

Long-term unemployment increased by 4.6% to 486,000 people, which suggests some labor market scarring is beginning to show, said Leah Nord, a senior director at the Canadian Chamber of Commerce.

“The job prospects for displaced workers grow slimmer with every month in lockdown as more businesses throw in the towel,” she said in a statement.

Total hours worked fell 2.7% in April, while the number of people working less than half their usual hours jumped 27.2% to 288,000.

“The hours worked numbers were I think weaker than had been expected,” said Andrew Kelvin, chief Canada strategists at TD Securities. “I think it suggests a weaker April than the Bank of Canada would have had penciled in.”

The Bank of Canada in April sharply boosted its outlook for the Canadian economy and signaled interest rates could start to rise in 2022.

The Canadian dollar was trading 0.3% lower at 1.2187 to the greenback, or 82.05 U.S. cents, after touching on Thursday its strongest level in 3-1/2 years at 1.2141.

(Reporting by Julie Gordon in Ottawa; additional reporting by Steve Scherer, Fergal Smith and Nichola Saminather, Editing by Hugh Lawson, Mark Heinrich and Nick Zieminski)

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Economy

Ivey PMI shows activity expanding at a slower pace in April

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TORONTO (Reuters) – Canadian economic activity expanded in April but the pace slowed from a 10-year high the previous month, Ivey Purchasing Managers Index (PMI) data showed on Friday.

The seasonally adjusted index fell to 60.6 from 72.9 in March. The March reading was the highest since March 2011 and the second highest since the PMI was launched in 2000.

Economic restrictions were tightened in some Canadian provinces in April to tackle a third wave of the coronavirus pandemic.

The Ivey PMI measures the month-to-month variation in economic activity as indicated by a panel of purchasing managers in the public and private sectors from across Canada. A reading above 50 indicates an increase in activity.

The gauge of employment fell to an adjusted 58.0 from 62.7 in March, while the supplier deliveries index was at 37.8, down from 39.6, indicating companies are having greater difficulty meeting increased demand.

The unadjusted PMI fell to 59.9 from 67.3.

 

(Reporting by Fergal Smith; Editing by Chizu Nomiyama)

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Economy

Canadian dollar rises for sixth straight week despite jobs decline

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar was little changed against the greenback on Friday as jobs data for both Canada and the United States fell short of estimates, with the loonie holding near its strongest level in 3-1/2 years and extending a weekly win streak.

Canada lost 207,100 jobs in April as fresh restrictions to contain a variant-driven third wave of COVID-19 weighed on employers, Statistics Canada data showed. Analysts had forecast a decline of 175,000.

In the United States, data for the same month showed employers hiring far fewer workers than expected, likely frustrated by labor shortages.

“You have this unhealthy environment where growth goals are struggling to be met but unfortunately inflation is picking up everywhere,” said Avi Hooper, a senior portfolio manager at Invesco.

Supportive of the loonie, one cause of inflation has been a surge in the prices of some of the commodities that Canada produces.

Copper surged to a record peak on Friday, fueled by speculators and industrial buyers as Western economies recover from the pandemic, while oil settled 0.3% higher at $64.90 a barrel.

“A higher oil price from current levels, we think, will be the catalyst for the next leg of Canadian dollar strength,” Hooper said.

The loonie was nearly unchanged at 1.2145 to the greenback, or 82.34 U.S. cents, having touched its strongest intraday level since September 2017 at 1.2125. For the week, it was up 1.2%, its sixth straight weekly advance.

The currency has been on a tear since the Bank of Canada last month signaled it could begin hiking interest rates in late 2022 and cut the pace of its bond purchases.

Canadian government bond yields fell across the curve. The 5-year touched its lowest since March 5 at 0.841% before bouncing to 0.878%, down 3.8 basis points on the day.

 

(Reporting by Fergal Smith; editing by Jonathan Oatis)

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