Entries from April 2020 ↓

The virus diaries

Jon’s a heart doc, transitioning from a small regional hospital to the Big Smoke. His new gig in the cardiac unit of a major Toronto medical centre starts Friday. “Huge promotion,” he says, “and now that Covid is moving offstage there’s a serious backlog of elective surgeries to handle. I will be busy.”

The good news: Jon’s owned a downtown condo for the past five years, where he’s planning on moving his small family. The bad news: he can’t.

“Two months ago I told the tenants I’d be coming back into my old place,” he says, “and they have refused to move out. Now I can’t budge them, and we have no place to land.”

Jon offered to give the tenants a payment equal to three months’ rent. No dice. He found them another, similar, unit downtown. Nope. He said he’d pay their moving expenses. Forget it. While he has the legal right to displace them for his own family, there’s no mechanism to do so. The Landlord and Tenant Board is shut. No tribunals. No judgments. In fact, as in several provinces during the virus crisis, there’s a no-eviction policy in place in Ontario. If a tenant refuses to leave, or even to pay rent, too bad.

Moreover when the board resumes operations, the backlog will be Biblical. It’s estimated the wait will be at least a year before a case is even heard. Meanwhile Jon’s condo is his property in name only. He’s scrambling to find a place for a family of four, plus beagle.

These are tough days to be a landlord. About a fifth of tenants paid no rent in April, thanks to the virus (and some bad attitude), and the situation may worsen this Friday. Things are even more dire for commercial property owners, since 80% of all small businesses are shut without revenue. More than 40% are expected to fail if the lockdown goes past the end of May. The feds’ business rent relief program just started taking applications (10,000 on the first day), and in order to get any revenue LLs have to agree to a 75% reduction for a few months. When you’ve got a big mortgage nut and property taxes to pay, that can be brutal.

Meanwhile Airbnbers are freaking out. A flood of condos is poised to hit the market since the vacation rental market evaporated and leasing to a residential tenant is guaranteed to lose money.

Amazingly, more than 15% of all the households in the GTA own rental property. About half of all new, pre-con condo sales have gone to speculators, investors and amateurs landlords. Of those who have rented to long-term leased tenants, 40% are believed to be in negative cash flow – and that was even before the virus made it perfectly okay for tenants to stiff you.

Clearly small-time investors have banked on (a) Airbnb cash flow or (b) year/year capital gains in the value of their units. Currently, both are pffft. And with the virus believed to become a semi-permanent feature of urban life, high-rise, DT condo living is a lot less glam. Just look at all the ‘touch-‘n-toss’ tissue boxes now riding around in elevators. Now think about the door handle into the garbage room. Yucko.

This landlord misery, political intervention, germ reality and tenant rentier class warfare could change real estate tastes and values over the next few years. In fact it might already be happening. Early pandemic numbers out of the US show a big surge in homebuilder activity, as buyers migrate away from the urban towers to suburban dirt.

That makes sense. Especially if this Covid thing morphs into a recurring seasonal flu-type plague. Why would young families not want a nice backyard to self-isolate in, a safe garage to disinfect the minivan inside of, real earth to grow cootie-free veggies and enough house space to safely socially distance? Try doing any of that on a balcony on the 50th floor.

Besides, who needs to go downtown anymore?  2020 has taught us that whole organizations can function with people at home, working remotely in their underwear. All you need is a strong Wi-Fi connection and a pooch to keep your feet warm. Screw the cublicle! And especially the commute!

Could this mean a suburban renaissance? After all, real estate is cheaper the further you migrate from downtown – or, at least, that was the pre-pandemic reality. Maybe in the new world order that’ll be reversed. Let’s wait and see.

In any case, detached will become the undisputed gold standard of housing, leaving condos for the unfortunates. By the way, if you need a good cardiac surgeon, I know of one living under a bridge.


The outcome

Stocks up again. Volatility down. Portfolios restoring. Man, this drives some people nuts.

Not a day passes without a renowned macroeconomist wag or savant quant analyst in the steerage section telling you, ‘markets will make new lows,’ or ‘the worst is to come.’ But it’s not happening. It’s done. Mr. Market hit the bottom in the third week of March. If you’ve been waiting with cash to jump in, you probably waited too long.

But, but, but, how could it be? This very blog has detailed the blood-and-guts status of the economy. Retail slaughter. Eight million on the dole. Oil heading back to ten bucks. Record household debt. Real estate Armageddon. Missed rents. Mortgage mayhem. Intestines and oozy juices everywhere. How come rich people with financial assets are getting a free ride? The over-leveraged, under-capitalized, no-savings deplorables demand blood!

It’s true. Stocks cratered 35% or more when the virus invaded. Since then there’s been a serious retracing. The S&P has zipped higher along with Bay Street. Fear’s gauge, the Vix, has plunged. Balanced and diversified portfolios took a tumble of 15% or more, then quickly reversed. Soon it may be as if a pandemic never happened, leaving investors whole while so many others in society are whacked.

So, yeah, why?

Markets retracing in a V pattern

First, as this pathetic blog has said repeatedly, pandemics are blips. They pass. This mess is not the result of a structural failure. Banks are not wobbling nor big corps failing. Politicians turned the economy off and artificially curtailed demand in order to deal with a health emergency. It was shocking, disruptive and hurtful, but also temporary. Markets and investors get this. Growth will be back in Q3, when I can finally get a haircut and stop looking like the lead guitarist in Black Sabbath.

Second, the response by central banks and governments was overwhelming. The Fed and the Bank of Canada crashed interest rates within days, then started buying up securities by the vanfull. The system is awash in liquidity. There’s no credit crisis of the kind that killed us in 2008-9. Governments followed this with the greatest amount of public spending since WW2. Trillions. Everybody is getting a cheque of some kind. It’s astonishing.

Third, we went into this coronavirus hell with a relatively strong economy – certainly in the US. Unemployment at a 50-year low, corporate profits robust, trade barriers coming down, record high consumer confidence, rising real estate markets, peak stock values, low inflation, cheap rates and a pending American presidential election. A lot of big companies report earnings this week. Prepare to be surprised.

Fourth, Covid didn’t kill us. Yes, many perished, sadly, and by the time things are done there may be two million infections in the States. But Canada has largely escaped. The curve flattened. The health care system didn’t buckle. Restrictions will be slowly lifted here, as is the case in Italy, China, New Zealand, several US states and elsewhere. What was believed to be a massive shortage of ventilators in the States turned into a surplus. Most of the fatalities have been among the aged, or those with underlying medical conditions. Society as a whole is not threatened. And when therapies or a vaccine emerge, CV19 will be just another thing. Remember measles used to kill. Diabetes was fatal. Markets are saying this is the beginning of the end, not the end of the beginning.

So as the economy turns back on corporate earnings can restore, taking the place of government and central bank stimulus. This would suggest the bottom was a month ago. It does not mean stocks won’t have some brutal days ahead. But it does signal a brighter future. Hope. The way out.

However, there’s bad news, too.

Remember this blog told you Covid would make the wealth gap grow? Yup. Happening. People with financial assets are emerging relatively unscathed. Gains beckon. But folks with big debts, no savings, no reserves and (for a while now) no incomes, are even more pooched. Says Deloitte economist Craig Alexander: “One of the great legacies of the current crisis is that after the pandemic has passed, we’re going to have more indebted households.”

The other big deficit is confidence. Wall-to-wall pandemic coverage by the Coronavirus Broadcasting Corp, and other MSM outlets has parroted the message of governments anxious to control and modify behaviour. History will tell us if they went overboard or the message was justified. But polls suggest a majority are quite happy to collect pogey instead of a paycheque and are terrified of being infected and quickly dying. That the number of active cases of the virus today (26,800) amounts to .07% of the Canadian population seems moot. Folks don’t care. They’re scared

Worried people are not risk-takers. They eschew investing. They buy condos, instead, using big leverage – which is perfectly safe because the bank gave them the money. They don’t trust financial markets, believe the government will look after their retirement and get new vehicles with 84-month loans. Household debt explodes. That’s understandable (if risky) when the economy’s firing on all cylinders. When a crisis hits, disaster. If a legacy of the virus is falling house values, business failures and structural unemployment (all likely), the chasm grows. The rich hold assets. The rest hold debt.

Which are you?