1. The Outlook for Global Capital Flows Richard Koss International Monetary Fund April, 2016 University of British Columbia 1 THE VIEWS EXPRESSED IN THIS PRESENTATION ARE THOSE OF THE PRESENTER AND SHOULD NOT BE ASCRIBED TO THE IMF OR IMF POLICY.

2. Housing is both a consumption good and an investment 2 Economic Growth Interest Rates Currency Movements Trade Balances Fundamental FactorsNon-Fundamental Factors Safe Haven Diversification Valuation “Housing is an essential sector…but also one that has been the source of vulnerabilities and crises” 1 – Min Zhu, IMF Deputy Managing Director 1 Era of Benign Neglect of House Price Booms is Over, Min Zhu, IMFdirect, June 11, 2014 Era of Benign Neglect of House Price Booms is Over

3. The world economy is growing modestly six years after the global financial crisis 3

4. We have seen a pattern of steady downward revisions in the outlook for global growth 4

5. U.S. growth remains on a slower track than experienced in prior recoveries 5 Source: Bureau of Economic Analysis

6. As China changes its development strategy towards a more services orientation, its imports growth falls 6 Source: Bureau of Economic Analysis

7. World trade is slowing 7

8. Commodity prices have fallen, sending a deflationary impulse around the globe… 8

9. …both in terms of interest rates… 9 Federal Reserve: Raised its target rate to 0.25%-0.50% in December after 7 years at 0.00%-0.25% European Central Bank: Dropped its target rate to -.40% in March Bank of England: Base rate at 0.50% for 7 years Bank of Japan: Dropped its target rate to -.10% in March Bank of Canada: Overnight rate at 0.50% since mid-2015 Swiss National Bank: Lowered target rate to -0.75% in January 2015

10. … and in terms of purchases of massive quantities of assets on their balance sheets… 10

11. …although this is somewhat offset by declines in reserves in some emerging markets 11

12. The result is very low bond yields… 12 Source: Bloomberg

13. Low interest rates have supported asset values around the world, notably in the housing market 13 “Detecting over-valuation in housing markets is still more of an art than a science” 1 – Min Zhu – IMF Deputy Director

14. The increase in home prices is modest in most countries 14

15. House prices in commodity-producing countries are quite mixed 15

16. Commodity-producing countries are among those experiencing lower affordability based on income 16

17. Commodity-producing countries are among those experiencing lower affordability based on rents 17

18. But some signs of stress can be seen in localities with high concentrations of commodity production 18

19. China’s Housing Market is also experiencing declines in affordability 19

20. Credit conditions remain supportive of most markets. 20 “The Policy toolkit to manage housing booms is still under construction” 1 Min Zhu. IMF Deputy Director

21. Direct Investment Flows into Canada have been Steady the Past Several Years 21 Source: Statistics Canada, Haver Analytics

22. Conclusions? 22 The fundamental drivers of capital flows out of China may be weakening as the growth outlook is pared back and global trade slows However, the picture is cloudy as China deals with volatility in the equity market, domestic real estate valuations and currency policy Persistent low interest rates remain a driver for hard asset markets like real estate, but valuations may be deterring more investment Canada has experienced somewhat more than average declines in affordability, but not out of line with the global experience Macroprudential policies are increasingly being brought to bear to deal with real estate overvaluations, while zoning and affordable construction and development policies are best suited to deal with local issues

23. Questions? 23