Entries from October 2019 ↓

Could be worse

It’s been one of those weeks. Whew. Where to start?

The president of the USA is being impeached, but will likely survive it. Trump might even welcome it, letting him play David to the deep state’s Goliath. Mr. Market still thinks Republicans will own the White House next year and that Elizabeth Warren’s a commie.

Interest rates are not plunging, dropping or going negative. Get over it. The Bank of Canada held the line, making no cut and saying it, “will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment and pay close attention consumer spending and housing activity–as well as to fiscal policy developments.”

In the States the Fed trimmed a quarter point (the third one), then said it’s done. No need for those four more nips that were expected just a few months ago, since the economy is doing fine, unemployment is the best in half a century, corporate profits are ducky and consumer confidence high.

Stock markets have been in record territory. Volatility (as measured by the Vix) is as interesting as Saskatchewan. The interest rate cuts of the last few months are just now working their way through the US economy, while inflation, incomes and spending are as expected. In short, expect more record highs.

What’s a likely scenario this Halloween, 2019?

Trump will look horrible as the impeachment hearings go public, but his voting base won’t care. The president will do something radical in 2020, with likely candidates being (a) an abrupt end to the China trade war, igniting markets or (b) a broad-based personal tax cut, igniting markets.

He wins the election after the Democrats have vivisected themselves and picked the wrong person.

The next interest rate moves by the Fed are up, not down. Bond yields shoot higher along with the capital value of preferred shares. The Bank of Canada looks like a genius for having remained calm and stoic when other CBs were spreading more stimulus than Beyoncé.

Rising rates bring a crisis to Ottawa, where the T2 gang has opened up the spending spigots, goosing the deficit and plumping the debt. Rising debt servicing costs wreak havoc with the fiscal plan, causing the feds to up taxes. All the 1%ers riot, but nobody notices. Meanwhile Peter MacKay shivs Scheer, takes over the Cons, and keeps Trudeau up at night with the thought of fighting Progressive Conservatives, instead of dinos.

Mortgages are never again 3% or less. The stress test rate goes up. Real estate stalls.

Jason Kenney loses 25 pounds, gets a black horse named “Wexit” and rides bare-chested with a Glock in his belt from Edmonton to Calgary prior to the Alberta referendum.

Or, not.

In any case, the winds of change are howling. Those who counted on a recession and falling markets will probably be disappointed. The bank will never pay you to take a mortgage, like in Denmark. And the longer than Donald Trump stays in office, the bigger corporations will grow and the more California will burn.

There’s plenty to be scared about. Just not what you thought.

Bad attitude

So Michael bought a condo. “No brainer,” he says. “All that crap on your blog is, well, crap.” And thus it became his – a one-bedder in DT 416 with a price tag of $620,000, as young Mike joined the investor class. A proud rentier. Required was 20% down and a half-million mortgage. The bank was happy to oblige.

The loan costs $2,300 a month and condo fees are $524 (for now). Insurance and property taxes chime in at $300 a month. Total overhead: $3,124. The opportunity cost of the downpayment (what it would earn if invested at 6%) is $620 a month. So the real cost of the rental condo is $3,744.

And the market rent? Well, that’s $2,600. Some investment. But Mike’s happy because, “the rent covers the mortgage and condos always go up”.

This logic is pervasive, and has been for some time. The tidal wave of speckers that’s washed over the property markets of Toronto and Vancouver is more responsible for an explosion in prices and rents than any whack of house-horny Chinese dudes.  For example, half all the new condos sold in the GTA last year went to amateur landlords, not end users. The average amount they mortgaged was just shy of 80% of the unit’s value. And the evidence is mounting a big swath of these people are bleeding bad.

For example, CIBC and Urbanation found 44% of rental-condo owners are in negative cash flow when only mortgage payments and condo fees are factored in. Once insurance, property tax and opportunity cost are added, that number is likely north of 60%. Maybe more.

Now Veritas discovered the same thing in a poll that company ran. Half of respondents admitted to losing money every month – again just from a cash flow perspective, rather than true ownership costs. The survey found only 18% of landlords actually make money, as opposed to sorta breaking even.

And this was an interesting conclusion: “House price corrections happen when there is a flood of sellers. In our opinion, the next flood will not come from a glut of new construction or even from owners, but from real estate investors and speculators.”

That’s not far-fetched, given the massive numbers of specuvestors active in the condo market and the cash half of them are hemorrhaging. Since price appreciation is the only reason condo ownership makes sense (augmented by the use of leverage), if the market levels or declines a lot will want to bail. We know from government stats that four in ten Toronto condos are not owner-occupied – a number which rises to almost 50% in delusional Vancouver.

Is condo ownership just a real bad idea?

Not entirely. If you live in one it’s pretty simple to compare the cost of owning to renting, then deciding if the premium to be an owner is worth it. Financially the answer is usually ‘no,’ given the high closing and selling costs owners face, along with escalating strata fees and city taxes. But people (especially first-timers) buy property more out of emotion than logic. Cultural myopia makes us crave real estate while social myth suggests renters are inherently less stable and make dodgy spouses. (Rule One for single, Tinderesque guys is to get a condo. “Chicks like that.”)

Anyway, as mentioned here a few times, nobody lives their full life in the same concrete box. Relationships, marriages, kids, maturity, career advancement – they all push people into property with actual dirt associated with it. That means demographics are also turning negative for condos. The majority of the downtown population is currently Millennials – the largest single cohort in the population – who are aging rapidly. Leading-edge moisters are now just shy of 40 years old. The trip from mom’s basement to a condo to the grave is apparently in full progress.

Well, back to Mikey. A month ago he had $125,000 in cash and no real estate. Now he has no cash, a condo losing $12,000 a year and $500,000 in debt.  And he thinks this is an improvement.

Multiply him by untold thousands of others and tell me, how does this end well?