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)
Economy
PM: Millennials and Gen Z drive Canadian economy – CTV News
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PM: Millennials and Gen Z drive Canadian economy CTV News
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Economy
Federal budget is about ensuring fair economy for ‘everyone’: Trudeau – Global News
Delivering remarks to his Liberal cabinet during a caucus meeting on Wednesday, Prime Minister Justin Trudeau emphasized that the newly-announced federal government is intended to help create a fair economy for “everyone” in Canada, particularly those from Millennials and Gen Z.
Economy
Russia to grow faster than all advanced economies says IMF – BBC.com
An influential global body has forecast Russia’s economy will grow faster than all of the world’s advanced economies, including the US, this year.
The International Monetary Fund (IMF) expects Russia to grow 3.2% this year, significantly more than the UK, France and Germany.
Oil exports have “held steady” and government spending has “remained high” contributing to growth, the IMF said.
Overall, it said the world economy had been “remarkably resilient”
“Despite many gloomy predictions, the world avoided a recession, the banking system proved largely resilient, and major emerging market economies did not suffer sudden stops,” the IMF said.
The IMF is an international organisation with 190 member countries. They are used by businesses to help plan where to invest, and by central banks, such as the Bank of England to guide its decisions on interest rates.
The group says that the forecasts it makes for growth the following year in most advanced economies, more often than not, have been within about 1.5 percentage points of what actually happens.
Despite the Kremlin being sanctioned over its invasion of Ukraine, the IMF upgraded its January predictions for the Russian economy this year, and said while growth would be lower in 2025, it would be still be higher than previously expected at 1.8%.
Investments from corporate and state owned enterprises and “robustness in private consumption” within Russia had promoted growth alongside strong exports of oil, according to Petya Koeva Brooks, deputy director at the IMF.
Russia is one of the world’s biggest oil exporters and in February, the BBC revealed millions of barrels of fuel made from Russian oil were still being imported to the UK despite sanctions.
Away from Russia, the IMF downgraded its forecasts across Europe and for the UK this year, predicting 0.5% growth this year, making the UK the second weakest performer across the G7 group of advanced economies, behind Germany.
The G7 also includes France, Italy, Japan, Canada and the US.
Growth is set to improve to 1.5% in 2025, putting the UK among the top three best performers in the G7, according to the IMF.
However, the IMF said that interest rates in the UK will remain higher than other advanced nations, close to 4% until 2029.
The group expects the UK to have the highest inflation of any G7 economy in 2023 and 2024.
Chancellor Jeremy Hunt said the IMF’s figures showed that the UK economy was turning a corner.
“Inflation in 2024 is predicted to be 1.2% lower than before, and over the next six years we are projected to grow faster than large European economies such as Germany or France – both of which have had significantly larger downgrades to short-term growth than the UK,” he said.
Conflict in the Middle East
Economists at the IMF warned that if the Israel-Hamas conflict escalates further in the Middle East it could lead to rising food and energy prices around the world.
Continued attacks on ships in the Red Sea and the ongoing war in Ukraine could also affect the so far “remarkably resilient” global economy, it said.
A potential spike in food, energy and transport costs would see lower-income countries hardest hit, it added.
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