Entries from May 2020 ↓

The Covid reset

Source: The Canadian Press

The virus is an agent of change. The transformation of society’s happening a lot faster since the pandemic came to town. Who knew a bug could do this? Look at the headlines…

The country’s biggest newspaper – in fact a company with real estate, presses, 4,000 employees, half-a-dozen dailies and 70 weeklies – just sold for pennies. Plunging revenues, crippling debt, social media carnivores and social distancing have finished off Torstar. Dead. Kaput.

Hertz is gone. Air Canada is at 5% capacity. Porter stopped flying. Most hotels are shuttered. Airbnb is toast. Uber is crippled. The pandemic ended global travel. Concerts. Conventions. For years, maybe a generation. The stay-at-home mantra changed everything. Netflix, not planes.

RIP the office. Millions may never return. Not only are elevators now death traps and the subway a mortal threat, but open work areas are impossible. So long as the virus lives, employers may insist on masks, temp checks and plexiglass screens to limit workplace liability. And who wants to toil in an ant farm? Work is now Zoom.

Shopping? Pfft. Have you seen the lineups to enter Costco? The grocery place? How can traditional department stores survive when people have to walk in one direction and stay six feet apart? They can’t. Neiman Marcus went broke. So did J Crew, and JC Penny. Pier 1. Reitman’s. Aldo. Victoria’s Secret. Lots more coming. Online or nothing.

This is but a taste of the reset. Some of it we saw coming. Some was a surprise. Evolution’s become revolution. The pace of this is dizzying – just two and a half months of Covid have destroyed business models in place for decades, and permanently wiped out of millions of jobs. Pilots used to be big shots. Concierges were condescending. Publishers were powerful. Hockey players and rock stars mattered. Now the FedEx guy reigns. Bezos is king.

And how long can government or the banks finance the change? Eight million households are on public benefits while a million property owners miss mortgage payments. What social morass awaits us when the CERB ends and home loan deferrals are gone?

Canadian unemployment goes ballistic.

How do we expect the traditional real estate market to function when unemployment stays at double-digits and lenders flee risk? Look at RBC. Our largest bank this week is setting aside almost $3 billion to cover bad loans – up inconceivably from $400 million just three months ago. Its core banking business shrank 66%. And how do you think the Royal will feel about giving your daughter 95% leverage to buy her first condo?

Many can see the changes fomenting around us. But so much more looms. Be careful.

A real estate reset is also at hand. How could it be otherwise now that 20% of all the families with mortgages have stopped paying and face a big, perhaps insurmountable, hurdle in a few months? Seven in ten of those households have scant equity in their homes, with loan-to-value ratios of 90 to 95%. Credible forecasters (CIBC, Moodys. CMHC) say property values will decline over the next year – no surprise given the destruction of jobs and employers now taking place. Obviously that means lots of souls – hundreds of thousands – will be in negative equity by this time next year. Maybe by Christmas.

Will RBC (and the other guys) happily renew mortgages for people without equity? Who stiffed the banks for six months worth of income? How many households will decide it’s far batter to sell and erase debt than suffer home ownership costs while on reduced income? When the direct deposits from Ottawa are over, what then?

Already, says analyst Dane Eitel in Vancouver, the writing is writ large. “CMHC’s announcement of a 9%-18% drop from current data points basically follows my forecast I have offered for years,” he says. In his latest YVR condo report there’s only one message – get the hell out.

“We forecast a prolonged downtrend of lower highs for the reaming months in 2020 and a further decline in 2021. Ultimately the condo market will test a threshold which hasn’t been seen since 2016. Signalling that 5 years of investment will have netted an investor zero increase of equity.

“The 2015 investor with a zero equity increase will be the envy of all those who invested during the market frenzy of 2017-2018. Every Condo purchased during these times will technically be under water in the upcoming years. Investing in real estate is not for the feint of heart. I vividly recall in 2017 the line ups for presales and the amount of complaining that occurred from those who didn’t get a chance to purchase because some investor bought multiple units. Thank your lucky stars those investors. Now it is them on the hook instead of you. In the upcoming months as those pre-sold buildings are completed you can purchase that same unit at a discount. Crazy how life works out.

“We do not advise any investment purchases or even owner occupied purchases in the current market. We would prefer buyers wait until prices are much lower as the inventory increases. Supply demand factors cannot be ignored. As for the investor owners who are about to be caught in this chaotic market, our advice, sell in May and go away… for years.”

Let’s review. Canadian households entered the Covid world with record debt. Half of us lived paycheque-to-paycheque. Unemployment is now at 1930s-levels. Huge numbers cannot, or chose not to, service their mortgages. House prices are inflated. Incomes are crumbling. Leverage is extreme. Savings are scant. A payment cliff looms. So deferrals will likely become defaults, as CMHC has forecast. Real estate values, no longer supported by full employment, must decline. Sales have tumbled.

And, yes, we’ve allowed real estate to become a major pillar of the economy, as we sell each other digs at ever-greater prices with bigger loans. At least, we did.

Think about that as you walk to the corner to get a paper. Oh, wait…

Bad dog

There was panic in the PR department over at Re/Max and Royal LePage last week. They might even had a picture of bad dog Evan Siddall on the wall, with a few bullet holes in it. (Okay, dart punctures, maybe.)

Used to be that the fed agency, CMHC, was just a big squishy, real estate-friendly fluffy media puppy for the major property floggers. For decades the people running it were industry veterans who saw their job as promoting housing. But no more. Mongrel Evan ended it all.

“Homeownership is like blood pressure,” he famously told MPs. “You can have too much of it.”

Yikes. Now everything changed. Says Re/Max spokesguy Chris Alexander: “A statement of this nature is panic-inducing and irresponsible.” In fact the company rushed out one of its famous ‘reports’ this week seeking to prove CMHC is full of fascists, malcontents, anarchists and yellow vesters who can no longer be trusted to make credible statements or forecasts. Like Re/Max.

What did Siddall do to inflame the realtors so?

He stated the obvious. We’re in a pandemic which is carving 30% from the economy, has swelled the jobless rate to 30%, put eight million people on the dole and could take a few years (if ever) to forget. Unemployed people living on pogey and unable to make rent or mortgage payments don’t buy houses, he said. Thus, there will be consequences. And he listed these:

  • Household debt, now at 99% of the economy, will swell to 130%  – enough to torpedo growth and job creation.
  • Property values across the country could drop by up to 18%.
  • A ‘deferral cliff’ is coming in September when mortgage payments have to resume and yet joblessness is still rampant, This is serious because…
  • …by September 20% of all mortgage households will not be able (or willing) to pay their home loans.

So the CMHC boss indicated he’d be suggesting to the Trudeau gang that the minimum down payment be doubled to 10% and other lending practices be modified to reduce demand for homes and spare new buyers from falling into a trap. “We feel we need to avoid exposing young people to the amplified losses that result from falling house prices. Unless we act, a first time homebuyer purchasing a $300,000 home with a 5% down payment stands to lose over $45,000 on their $15,000 investment if prices fall by 10%.”

Poop, says Re/Max. Prices will not fall since, “sellers simply won’t accept that kind of discount on their listings.”

“CMHC doesn’t seem to understand the sheer number of sellers that would have to accept this kind of price reduction, in order for average housing prices to plummet to this degree in such a short time span.”

The company says there’s zero evidence of a declines in Toronto, for example, where multiple bids continue, demand is high, and offers continue to be made despite social distancing and the terrifying sight of realtors in pale blue spandex. So while sales activity has plunged by about 70%, prices have held firm. Thus, Re/Max concludes, it only gets better from here. Now Shaun Cathcart, senior economist at CREA, the national real estate outfit, agrees. Uppa, uppa.

   Not so fast. Sales may have fallen, but so have listings – dramatically. Last April there were 17,600 new offerings in Toronto, and this year that crashed to 6,100. So fewer buyers were chasing diminished supply, which is why prices have held steady – despite a sick economy and galloping unemployment. What Siddall is saying is simple. Expect a change. When mortgage deferrals end (and people are still out of work) there could be a tsunami of new listings as indebted families bail.

And let’s not forget the Airbnb factor. When the pandemic came to town there were more than 21,000 short-term rentals in the GTA alone, a lot of them condos bought for exactly that purpose. No more. That business has collapsed. The company has spent $250 million to offset the losses of hosts due to a barrage of cancelations, cancelled its IPO and laid off a third of its staff. Just peruse the condo listings, and you can see the extent of the carnage. Many more of these ghost hotel units will be coming on stream as the year progresses.

There ya go. Logic says housing will be infected by the virus. But along comes new evidence showing sales in the first half of May were much stronger than the month before, even as the job situation deteriorated. So could it be that Re/Max logic will win? Are there enough greater fools roaming the streets to keep real estate alive until a vaccine arrives?

As always, buy a house if you need one and can afford it without gutting your finances, jeopardizing your retirement and family or enslaving you to debt. Alternatively, you can invest in rising financial assets, collect your CERB, rent a beautiful place for peanuts and stop paying your landlord. Tough choice.