Entries from August 2020 ↓

The toll

This blog stepped off the curb yesterday into a steamy little pile of poo. That’s tough on the spats. Worse, it creates havoc in the steerage section. Karens everywhere.

The crime was simple, saying people wear masks because they have fear. Fear of Covid. Fear of getting it, spreading it, facilitating it, enabling it. This may be glossed with language like, ‘it’s respect for others’, but anxiety lurks within.

Yes, we’re scared. A new KPMG poll shows just how much. Over 50% of Canadians say they’re too terrified to go back to work and 77% fear their co-workers will infect them if they do return. Six in ten will refuse to venture to the workplace if they deem it unsafe and almost 80% of Ontarians say they don’t want to use public transit to commute. This is a huge problem for employers. It’s a reason all the major banks, for example, have given up – head office workers are off until sometime in 2021. The soaring towers stand mostly empty. The condos around them are eroding in value.

Fear is moving politics. The Canada-US border will stay closed for a long time, despite the economic implications, since 82% of people here are afraid of Americans. Even within Canada there is public support to keep some provincial borders shut. And big debates are taking place about the kids going back to school.

Whether this level of public anxiety is justified by the severity of the virus and its impact on the health care system won’t be known until it’s gone and a rational analysis takes place. But the economic consequences are clear. Millions unemployed. Historic government deficits. Mortgage deferrals. Business failures. Also evident is the terror this has caused in society. It will be a long time before normal comes back, since we no longer trust each other. Masks seem a potent symbol of that mistrust.

By the way, I wear mine. It’s the law in public, indoor spaces. Being masked is being responsible and compliant. However every time I don it, there’s regret. We are growing more distant from each other. Fearing airborne droplets. Afraid of the people we used to call friends at work. Scared of the office. Wary of customers coming into the shop. It’s now a world of online retailing, online entertainment, Zooming, contactless purchases, social distancing and aloneness. Such a state cannot be permanent or the economic and financial security we’ve enjoyed to date will be gutted.

The stated goal when Covid hit was to flatten the curve, slow the spread and allow the health care system to deal with it. In Canada, that was achieved. The hospitals are okay. ICUs not packed. No ventilator crisis. The long-term care homes are far safer. We have been remarkably successful in avoiding infections by doing everything others are not. Much to be proud of.

The new goal appears to be virus eradication. No cases at all, since the current infection rate (less than one half of one per cent of Canadians) is deemed to be too much. All states of emergency remain in place. Governments continue to enforce behaviours. Legislatures are still suspended in most places. Mayors, premiers and the feds act in dictatorial fashion, and with the support of most people.

But at what point will workers stop being afraid of their colleagues or the subway? When will meetings resume? When will shopping no longer be painful, the government cheques end and small businesses stop going extinct?

A vaccine may be the endgame. But what if it doesn’t come for a few years? Or if all the anti-vaxxers refuse to be dosed, compromising herd immunity?

Some months ago we said this was not a virus blog. No serious epidemiology here. No expertise on infectious diseases. No public health insights, or advice to give. Still the case. But that was April. This is August. Covid seems under control in Canada (yay!) but the level of public anxiety has only increased. That KPMG poll is completely bad news for the economy, and the recent mandating of universal mask-wearing in most places is a daily, constant, in-your-face reminder that the virus – despite the numbers of infections – is winning.

Here is today’s question. I ask that everyone making a comment answer it: for you, how does this end?

Moral hazard

As goes 416, so goes Van. The latest housing stats from YVR echo those in Toronto, where sales have jumped more than 20% from last July, despite the fact last summer there was (a) no pandemic, (b) no CERB, (c) no mortgage deferrals, (d) eight million people still had jobs, (e) your office was still open, (f) nobody wore a mask, (g) only a crazy person would believe the federal deficit would be $450 billion and (h) you didn’t know what what a “WE’ was.

Wow. So many changes. So much to go wrong. Nine thousand Covid deaths in Canada, Lockdowns. Airlines grounded. No tourism. Depression-era unemployment stats. A recession. And, yup, FOMO – driving house sales nuts form Halifax to Victoria.

Once again we’re reminded of a truism on this blog from years ago: there’s an inverse relationship between interest rates and real estate. When one goes down, the other one goes crazy. This year, especially, when the contrast between an orgy of buying and the economic destruction the pandemic has caused is acute.

Well, there’s more coming. A significant national lender has now broken the 2% barrier for an advertised five-year fixed mortgage rate. Quietly the major banks have been handing out such loans at around 1.98% (or a little less), while their official posted rates remain higher. But Tangerine has dipped to 1.99% (although it’s a collateral mortgage). As mentioned here the other day, 10-year money has also been eroding in cost, with a decade-long mortgage now available at a little over 2.5%.

So does this make variable-rate mortgages unwanted?

Mostly, yeah, it does. VRMs might be had for a couple of basis points less, but why bother? A fiver at these prices means your loan rate will almost certainly be lower than inflation in the years ahead. That’s akin to free money. So this generational, virus-induced collapse in the cost of home loans is exactly why we have a real estate boom in the middle of a health crisis. That, plus the fact the spring market was pushed into July.

Not only are fixed-term rates equal or less than the cost of a variable-rate loan but (a) they are likely to drop further (a little) as central banks pump out stimulus and drive bond yields lower, and (b) this won’t last. When Covid fades as vaccines arrive, those CBs will be raising rates again to offset the ridiculous accumulation of debt they’re causing. Borrow today at 1.9% and look like a Nobel economics laureate in 2024. Easy to get dates then.

So will this boomlet last?

   In a blog post this week, then in a Toronto magazine article, my answer was ‘no.’ Of course not. Cheap mortgages combined with pent-up demand and low inventory is realtor catnip, but we continue to face strong economic headwinds. Unemployment will still be double-digits by Christmas. Mortgage deferrals will come to an end. CERB is turning into EI – which has a negative footprint on credit/employment histories. The airlines, tourism, entertainment, hotels, sports, live entertainment, bars, conventions and trade shows – all these sectors have been hobbled and will remain so as long as social distancing is in place and pandemic fears rage. It was interesting some industry rockstars attacked me for saying such things. Moral hazard, I guess.

So what about a second wave?

No idea if it’s out there, or just media fiction. But we do know most Canadians are freaked out about Covid, unwilling to see the border open, suspicious of eating out and terrified of flying. The masks everyone now sports are visible symbols of a surrender to fear.

In this environment, the sales and price stats bursting out of the major centres (except those in Alberta, Saskatchewan, Manitoba, NB and the Rock) look like aberrations. Buyers are certainly embracing risk. And it’s not over yet. As infections spread in the US and the gong-show presidential election approaches, bond yields could fall further taking mortgage costs with them. Not a lot. But enough to hook more buyers and jack up values.

Amazing. A 13% unemployment rate and record property prices. Something has to give.

By the way, a recent Edward Jones survey found the pandemic is sinking retirement plans for a lot of folks in their 50s and 60s. They’re diverting income to supporting their Millennial offspring, and lack enough savings – since most net worth is in real estate. The median nestegg among members of this cohort without a corporate pension plan is… wait for it… just $3,000.

That’s what real estate does. The illusion of security.