MacroScope

The Bank of Canada is probably not ready to seriously consider cutting rates — yet

With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.

But that doesn’t mean Governor Stephen Poloz is ready to signal on Wednesday that his rate shears are about to get hauled out of the shed.

Yes, economic growth is expected to be restrained over the next couple of quarters, the long-awaited pick up in exports and business investment still seems elusive and inflation continues to remain undesirably weak.

Even the last monthly jobs report, which tends to be volatile, was a bit of a shock, showing nearly 46,000 job losses during the month when every forecaster was expecting net hiring.

But an overheated housing market built on a mountain of household debt – one of the highest per capita in the world – doesn’t need more stimulus from even lower rates.

Banking disunion

The full Ecofin of 28 EU finance ministers meets after Monday’s Eurogroup meeting of euro zone representatives didn’t seem to get far in unpicking the Gordian Knot that is banking union. Ireland’s Michael Noonan talked of “wide differences”.

The ministers are seeking to create an agency to close euro zone banks and a fund to pay for the clean-up – completing a new system to police banks and prevent a repeat of the bloc’s debt crisis.

But a German official rejected a euro zone proposal unearthed by Reuters that would allow the euro zone’s bailout fund, the European Stability Fund, to lend and help finance the cost of any future bank rescues or wind-ups. Berlin does not want to end up footing the bill for failures elsewhere and is still constrained because a coalition deal to form the next government has yet to win final approval from the Social Democrats.

Housing boom and bust lesson still not sinking in

Housing markets are booming again in parts of the U.S. and Britain and they haven’t stopped doing so in Canada for the better part of a generation.

What is most striking about the latest round, at least when you listen to those who ought to know, is how nothing much except the price has changed.

We were told a stern lesson in the months and years after the financial crisis, borne out of an over-inflated, over-leveraged U.S. housing market securitised up to the scalp by Wall Street and leaping ever higher up a steeper incline on a blind instinct never to look back.

The big questions on the UK housing market: what the analysts say

Although UK house prices will head steadily higher in the next two years, analysts polled by Reuters are divided over whether the Bank of England can restrain the market if it overheats. Here’s what they said in the latest Reuters poll, taken this week: How confident are you in the BoE’s ability to moderate the housing market if necessary?

PETER DIXON, COMMERZBANK: “Not very. A cynical interpretation would be that the government wants to see a decent rise in house prices over the next couple of years and would not be best pleased to see the BoE take the steam out of it. Nor is it clear that the BoE has the policy instruments to target the housing market without causing collateral damage elsewhere in the economy. Finally, it would call into question the thrust of policy if Help to Buy is giving to the housing market with one hand whilst the BoE is taking away with another.”

PHILIP LACHOWYCZ, FATHOM FINANCIAL CONSULTING: “Not at all. The Bank of England through the FPC does now have the instruments and mandate to take specific action in the housing market. However, we find it unlikely that it will take any action as it would mean directly working against government policy.”

Forever blowing bubbles?

UK finance minister George Osborne is speaking at a Reuters event today, Bank of England Deputy Governor Charlie Bean addresses a conference and we get September’s public finance figures. For Osborne, there are so many question to ask but Britain’s frothy housing market is certainly near the top of the list.

The government is extending its “help to buy” scheme at a time when house prices, in London at least, seem to be going through the roof (no pun intended). Property website Rightmove said on Monday that asking prices for homes in the capital jumped 10.2 percent in the last month alone.

The Royal Institution of Chartered Surveyors has suggested the Bank’s Financial Policy Committee should cap house price inflation at 5 percent a year. A Bank of England policymaker retorted that it wasn’t down to his colleagues to regulate prices.

From 1999: Another UK housing bubble? No chance!

While debate rages on whether or not Britain is heading into a new housing bubble, here’s a Reuters poll from 1999 that asked the same question. The answer then was,  ”No, this time is different”, and it featured a lot of the same arguments we’re hearing today.

Here it is, posted in full:

POLL-UK property recovery not a 1980s bubble

By Penny MacRae

LONDON, Aug 18 (Reuters) – Is Britain seeing a rerun of the 1980s property boom?

As buyers scramble to beat rising house prices, it may seem to many as though the roaring 1980s have returned.

How to play down a housing boom like it’s 1999

Here’s some of the top reasons from a 1999 Reuters poll on why a housing bubble wouldn’t form, which are re-appearing 14 years later.

The Bank of England will stop a bubble forming

    2013: “If there’s another bubble, the Bank of England and the Government of course have means by which we can anticipate that and ensure that that doesn’t happen again.” – Danny Alexander, chief secretary to the UK Treasury.
    1999 Reuters poll: ”Economists and property specialists say the Bank of England won’t let another inflationary boom happen. The Bank has already said it will monitor house prices closely. ‘It’s unlikely to become inflationary unless the monetary policy stance becomes too loose and that’s highly unlikely,’ said economist Trevor Williams of Lloyds Bank TSB.”

 

House prices expressed in real terms are below their peak and affordability is better

Right time to pump up UK housing market?

The British government is poised to announce the extension of its “help to buy” scheme for potential home owners.

As of today, any buyer(s) of a property up to a value of 600,000 pounds ($960,000) who can put up a five percent deposit, will see the government guarantee to the lender a further 15 percent of the value so a bank or building society will only be lending on 80 percent of the property’s value. Until now, demands for cripplingly large deposits have shut many prospective buyers out of the market.

The big question is whether now – with property prices rising by around 3 percent nationally and by a heady 10 percent annually in London – is a sensible time to be doing this given Britain’s long history of housing bubbles.

Britain’s Help to Buy – what the forecasters say

Now Britain’s housing market is showing real signs of life, should the government abandon its “Help to Buy” scheme to boost access to the market for homebuyers?

Economists and property analysts polled by Reuters over the last week were split. Two weeks ago, a majority of economists put the chances of another UK housing bubble forming at 50 percent or greater, catalysed by the Help to Buy programme.

Here’s a few comments on either side of the debate. Cancel Help to Buy:

“The housing market was slowly recovering already, it has been good for the sector, but in the long term it is throwing money at something that is not the solution. There is a danger we are creating the next bubble and not learning from what’s happened previously.” Mark Hughes, co-head of research, Panmure Gordon

U.S. housing outlook still promising despite rise in rates: Citigroup economist

U.S. housing sector fundamentals remain favorable despite the recent rise in interest rates and the sharp drop in housing starts in June, says Citigroup economist Peter D’Antonio.

Housing starts fell 9.9 percent to a ten-month low of 836,000 units in June.

But the decline was almost all in the volatile multi-family sector, D’Antonio notes. Single-family starts remained in a range just below 600,000, while multi-family fell 26 percent to 245,000.

Multi-family starts have been an important growth sector in housing in the past year, but month-to-month changes in multi-family starts – noted for their volatility – are meaningless. Multi-family housing starts rose 21 percent in March, fell 32 percent in April, rose 28 percent in May, then fell 26 percent in June.