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World's Most Housing Exposed Economy Faces Ultimate Stress Test – BNN

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(Bloomberg) — Australia’s A$7.1 trillion ($5.2 trillion) housing market is facing the ultimate stress test — the first recession in almost three decades — and passing with flying colors for now.

Economists had predicted property prices would tumble 10% or more as Covid-19 swept Australia; now, they’re scrambling to reverse those forecasts to gains of 5-15% in the next couple of years. Policy makers have switched from worrying about plunging prices to being on guard for excessive exuberance.

A recent Saturday auction at the Sydney suburb of Forest Lodge — around 2.5 miles from the city center — captured the bullish mood. About 30 people gathered in front a four bedroom Victorian terrace up for auction. The bidders — ranging from younger professionals to middle-aged people — kicked off at A$2.4 million and moved up in increments of A$10,000, then A$5,000, until the hammer came down at A$2.74 million.

It’s a dynamic that’s emerging in other countries as low interest rates fuel asset prices. While the housing strength is good news for the economy’s recovery, to housing bears — who have been proved wrong time and again for a generation in Australia — further gains risk fueling the bubble that is destined to pop one day, leaving a trail of bad debts.

The lending books of Australia’s banks are among the world’s most exposed to mortgages, with housing loans at the major four banks equating to about 75% of the nation’s approximately A$2 trillion gross domestic product. The statistics office estimates the value of the nation’s residential dwellings was A$7.1 trillion in the June quarter, when the weighted average prices in capital cities rose 6.2% from a year earlier.

Behind the bonanza are interest rates at levels unseen in Australia before. Three of the nation’s four big banks are offering fixed-rate mortgages below 2%, and HSBC Holdings Plc. is offering 1.88%, according to Mortgage Choice Ltd.. a broker. That’s been facilitated by the Reserve Bank of Australia cutting its interest rate to 0.10%, as well as its bond-buying and bank lending programs that aim to lower borrowing costs across the economy.

“It’s not a place I think anybody thought we would be,” said Susan Mitchell, chief executive officer of Mortgage Choice. “There’s a lot of stimulus. I’m a bit worried about prices spiking up.”

Safe as Houses

RBA modeling found that even in a scenario where the economy contracted by 20% and unemployment soared to 20%, banks still wouldn’t breach minimum prudential capital requirements. “The likelihood of a major bank failing is very low,” it says.

The RBA has made clear that reducing unemployment is its priority for now, rather than worrying about asset prices. Governor Philip Lowe has said the absence of population growth — with international borders still closed — changes housing market dynamics and he doesn’t think an unsustainable increase in housing prices is likely.

Yet there are tools should the situation change.

“We know from the experience of recent years that the macroprudential instruments can curtail the growth in debt in a stabilizing way. So it’s an issue we’re watching carefully, but I’m not particularly worried about it at the moment,” Lowe said during a panel at the Australian’s Strategic Forum 2020 on Wednesday.

By contrast in New Zealand, where some regions are recording double-digit house price gains despite the worst recession in a century, economists expect loan-to-valuation ratio restrictions will be put in place early next year.

Fiona Guthrie, chief executive officer of Financial Counselling Australia, worries more people will end up finding themselves under financial strain from easier finance rules.

“Weaker lending standards mean people will be loaded up with as much debt as possible,” she said. “There is significant profit to be made in pushing borrowers to the edge.”

Sea Change

Yet, much like the uneven nature of the economy’s recovery, the housing market strength isn’t uniform. Many people living in inner city apartments in Sydney and Melbourne are looking for more space.

“The virus has become a catalyst for change that is seeing us refashioning our homes and rethinking where we want to live,” said John McGrath, chief executive officer of real estate agent McGrath Ltd.

The result has been a collapse in rents and flat prices — with more to come as apartment blocs are still under construction. That’s unlikely to hurt Australian banks, which have steered clear of developers after a recent period of over-building. But it does impact mom and pop investors.

In addition, there are households still on deferred mortgage repayments because they lost their job in the Covid lockdown. When these are scaled back and loan holidays end sometime next year, they could be forced to sell.

World-champion kite surfer Ewan Jaspan is among the sea changers. Being in a trendy St Kilda flat 24/7 with limited outside space in Melbourne wasn’t ideal, so he and his girlfriend decamped to tropical Queensland. Initially the plan was to stay for two or three weeks. That was a few months ago.

“A lot of people are working remote anyway, so why would I be in the city in a tiny apartment when I could have a garden and outside space and be at the beach?”

©2020 Bloomberg L.P.

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Economy

Canadian dollar moves to extend weekly win streak as oil rebounds

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Canadian dollar

The Canadian dollar strengthened against its U.S. counterpart on Friday and was on track for its seventh straight weekly gain as oil prices rose and domestic data added to evidence of robust economic growth in the first quarter.

Canadian factory sales rose 3.5% in March from February, led by the motor vehicle, petroleum and coal, and food product industries, while wholesale trade was up 2.8%, Statistics Canada said.

The price of oil, one of Canada‘s major exports, reversed some of the previous day’s sharp losses as stock markets strengthened, though gains were capped by the coronavirus situation in major oil consumer India and the restart of a fuel pipeline in the United States.

U.S. crude prices rose 1.2% to $64.61 a barrel, while the Canadian dollar was trading 0.6% higher at 1.2093 to the greenback, or 82.69 U.S. cents, moving back in reach of Wednesday’s 6-year peak at 1.2042.

For the week, the loonie was on track to gain 0.3%. It has climbed more than 5% since the start of the year, the biggest gain among G10 currencies, supported by surging commodity prices and a shift last month to a more hawkish stance by the Bank of Canada.

Still, BoC Governor Tiff Macklem said on Thursday if the currency continues to rise, it could create headwinds for exports and business investment as well as affecting monetary policy.

The U.S. dollar fell against a basket of major currencies, pressured by a recovery in risk appetite across markets after Federal Reserve officials helped calm concerns about a quick policy tightening in response to accelerating U.S. inflation.

Canadian government bond yields were lower across much of a flatter curve, with the 10-year down 2 basis points at 1.549%. On Thursday, it touched its highest intraday in eight weeks at 1.624%.

 

(Reporting by Fergal Smith; Editing by Nick Zieminski)

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Toronto Stock Exchange rises 1.21% to 19,366.69

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Toronto Stock Exchange

* The Toronto Stock Exchange‘s TSX rises 1.21 percent to 19,366.69

* Leading the index were SNC-Lavalin Group Inc <SNC.TO​>, up 16.0%, Village Farms International Inc​, up 9.8%, and Denison Mines Corp​, higher by 9.4%.

* Lagging shares were Aurora Cannabis Inc​​, down 7.2%, Centerra Gold Inc​, down 3.8%, and Canadian National Railway Co​, lower by 3.7%.

* On the TSX 194 issues rose and 35 fell as a 5.5-to-1 ratio favored advancers. There were 25 new highs and no new lows, with total volume of 225.7 million shares.

* The most heavily traded shares by volume were Enbridge Inc, Manulife Financial Corp and Cenovus Energy Inc.

* The TSX’s energy group rose 3.32 points, or 2.7%, while the financials sector climbed 4.80 points, or 1.3%.

* West Texas Intermediate crude futures rose 2.65%, or $1.69, to $65.51 a barrel. Brent crude  rose 2.68%, or $1.8, to $68.85 [O/R]

* The TSX is up 11.1% for the year.

This summary was machine generated May 14 at 21:03 GMT.

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Economy

U.S., Mexico, Canada to hold ‘robust’ talks on trade deal

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The United States, Mexico and Canada will next week hold their first formal talks on their continental trade deal, with particular focus on labor and environmental obligations, the U.S. government said on Friday.

Trade ministers from the three nations are set to meet virtually on Monday and Tuesday to discuss the U.S.-Mexico-Canada (USMCA) deal, which took effect in July 2020.

“The ministers will receive updates about work already underway to advance cooperation … and will hold robust discussions about USMCA’s landmark labor and environmental obligations,” the office of U.S. Trade Representative Katherine Tai said in a statement.

The United States is also reviewing tariffs which may be leading to inflation in the country, economic adviser Cecilia Rouse told reporters at the White House on Friday, a move that could affect hundreds of billions of dollars in trade.

The United States, testing provisions in the new deal aimed at strengthening Mexican unions, this week asked Mexico to investigate alleged abuses at a General Motors Co factory.

(Reporting by David Ljunggren; Editing by Hugh Lawson and Jonathan Oatis)

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