Entries from August 2020 ↓

Ottawa. Victoria. Niagara. Kelowna. Montreal, Toronto and Vancouver. Mississauga, Burnaby, Etobicoke, Abby and PoCo. It’s the same story everywhere. House sales exploded in July and August. Prices have risen to meet demand, since inventory levels in most markets were at a Covid low.

Logically, this is nuts. Unemployment in Canada is north of 10%. In centres like the GTA, a lot worse. Millions remain on government pogey and hundreds of thousands have been unable to pay existing mortgages. Small shops, restaurants and factories have been whacked and many will never reopen. Tourism is dead. So are conventions, sports and travel. The country’s in the midst of the worst recession since the 1930s. Nine thousand people have died of a contagious virus for which we have no cure. Social distancing and masks have crucified retail and are destroying eateries. Downtown cores are dusty wastelands. Schools have been shut for six months. Airport passenger levels are down 90%.

And yet, a real estate feeding frenzy. Debt levels are surging. Bidding wars, blind auctions, bully offers and people grabbing houses they’ve only Zoomed or FaceTimed. It’s all happening. It’s real. It defies reason.

And it’s not just isolated, a unique Canadian affliction. Check out these headlines from my daily feed:

Why the Indiana housing market remains so hot during the pandemic
The Indianapolis Star

New Yorkers are Fleeing to the Suburbs. ‘The demand is insane’
The New York Times

Hot Property newsletter: Hot times in the real estate market
Los Angeles Times

Why residential real estate is becoming more attractive in the suburbs
Montgomery County Paper

Real estate market soars despite pandemic
Roanoke Times

Real estate sales reaching lofty heights
The Anna Maria Island Sun

Why residential real estate in South Bay is red hot despite the pandemic’
San Jose Spotlight

Act fast to land a home in today’s market
Orange County Register

Expert: Panic buying hits Denver housing market
Westword

Housing market continues to soar in southwest Michigan
ABC 57 News

Portland broker see rebound in housing market during pandemic
KGW.com

Millennials help power this year’s housing-market rebound
Wall Street Journal

Record sales, record prices in Colorado’s real estate market’
9news.com KUSA

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If we can understand why this is happening, perhaps we can determine if it’ll last. Knowing that could answer this question: are today’s virus buyers savvy or senseless?

The obvious first reason houses are going up is that interest rates have come down. Cheap mortgages allow folks to borrow more, spend more, and squeeze prices higher. Second, we had no spring market. It was lockdown time, so pent-up demand exploded like a sailor on shore leave. Third, demographics have been pushing real estate. The largest cohort in society are the Millennials, all 9.8 million of them. That’s 27% of the population, and they’re all horny. For houses.

But those are just the reasonable reasons. There are a slew of unreasonable ones, too. They have to go with a certain global pandemic. Maybe you heard.

Covid has infected millions of brains, inserting fear and a sense of victimization. In a scary, out-of-control world which is beyond the experience of anyone alive, people are seeking shelter, refuge, safety and all the predictability they can get. Nesting. Cocooning. Owning a home seems like gaining control over your own surroundings and destiny. In the fog of emotion it seems if you lost your job, or society continued to unravel, you’d be better off as an owner than a renter who could be turfed. Of course that ignores the far higher costs of owning than leasing, but this is no time for logic.

Then there’s the direct virus impact. Millions are working remotely, so the dwelling becomes their world, 24/7 & 365/yr. They want more space from kids and spouse. The office downtown is shut now and may be for a year. So they can move to the burbs or a small hinterland city and finance more house. Meanwhile fear of germs, strangers in the hallway, sticky elevator buttons and scary garbage rooms have fueled a flight from high-rise condos into low-rise semis, towns and detacheds.

Layer on this a thick coating of financial illiteracy. Most people have no liquid investments, have never invested, think the stock market is a casino and only know their parents made a fortune on a house they bought in 1978. So what if they need a $1 million mortgage now? Nobody actually expects it off since you’re renting money as you move up the property ladder with equity the market hands you. every year.

Lastly, all of the above has created FOMO. Fear of missing out. It’s a huge driver of the emotions which lead people to take irrational actions. Toronto agent Steven Fudge has written about this convincingly:

Fear evokes a visceral reaction, which focuses entirely on the moment (fight or flight). FOMO has incredible strength and ability to separate people from their logical assessment of a property. Things like budget, property inspection and even the concept of debt are pushed directly to the side as the homebuyer focuses on the task at hand and is willing to do what it takes to secure a purchase.

As a result, in the midst of a pandemic and the worst downtown in our lives, house prices have peaked and household debt is soaring when rates are at an historic low and can only increase. What could possibly go wrong?

Well, the mortgage deferrals are done. No more. Now we get to understand the consequences.

Earlier today the federal regulator dropped the hammer, telling banks any new deferrals they grant will be treated as non-performing loans, requiring them to raise more capital. In effect, it signals the end of a six-month period in which almost 800,000 families stopped paying their obligations.

The program will be phased out over the next 90 days with the bulk of deferrals ending next month. “Banks are now in a better position to employ their business-as-usual alternatives to support troubled borrowers,” the regulator said. In general that means moaning and weeping.

It’s begun.

Chrystia. Justin. Taxes. A trillion in debt. Biden-Trump mashup. Second wave, maybe? Mortgage deferral cliff. Millions on the dole. BLM in the streets. Cops defunded. Statues falling. Vigilantes. Masks protests. Historic deficits. 847,659 deaths. Closed borders. And a real estate boom. Oy, whadda world this is.

The afflicted believe governments should support them. The paleos think commies are taking over. The left-right divide is gaping just like the wealth disparity. The pandemic came along and crushed the indebted, the unprepared and the uninvested. The same crisis propelled markets as stimulus flowed and portfolios plumped. Now it’s all political. The rest of 2020 will be even more arresting than the first eight months.

Determined not to waste this crisis, the prime minister punted his Bay Street finance minister, installed a lefty journalist, shut down Parliament and is preparing a ‘go big’ plan for a green new deal. Details in four weeks. Then a badass budget. Meanwhile the USA is in the grip of a presidential contest that resembles a brawl. And the virus continues.

Last week this pathetic blog naively asked, how to prepare? How to ready for a world that promises more government, more tax and greater wealth distribution? As you know, most citizens are pooched and expect politicians to bail them out. They continue to save nothing while over-spending on real estate. Theirs is a world of hopium. And they all vote. Yikes.

Some suggestions…

Emergency fund – a perennial tenet of financial advisors, but does it really make sense to have enough money for six months of living expenses sitting in a HISA paying one-half of one per cent (taxable)? Ah, no. A better option is to ensure you have a personal line of credit established with your bank or CU, and invest that emergency money in your TFSA in some nice, cheap, diversified ETFs.

The LOC costs zero to set up and zero to maintain. The only interest payable is on the money actually drawn from the line, and odds are an emergency will never occur. If one does, just look needy and the feds will send you money!

Refinance debt. This is the time. Rates are in the ditch and will stay there for months. Maybe a year or two, until inflation starts being a threat. Lock in the mortgage at less than 2%. Don’t be a cowboy and go variable to save a few thin basis points. If an existing mortgage is 3% or more, talk to your lender about blending and extending the loan. This will reduce the overall rate, push out the renewal date and avoid a mortgage break fee.

Capital gains. Take them soon. Most observers (this blog included) think the odds are high T2/Chrystia will up the inclusion rate from 50% to maybe 75%. That’s a mother of an increase. Today half of gains are tax-free with the other half added to your income and taxed at your own marginal rate. So upping this to three-quarters is punitive.

The amount of revenue the tax raises is inconsequential in the face of a $350 billion annual deficit, but it’s a political move designed to message those with no investments (but a house) that the 1%ers are being shellacked. While it’s possible the change could be retroactive to the beginning of the year, it’s doubtful, given a budget won’t come until October at the earliest. We’ll see.

Or you can wait until Erin O’Toole is prime minister. Ha.

Other portfolio moves: keep at least 20% in US$-denominated assets. Once the American election is done and the virus starts to fade, the greenback is likely to appreciate while our balance sheet is weighted down by public spending. The loonie could weaken – but it’s always a good idea to hedge against our currency.

Also keep your registered accounts – TFSA, RRSP, RESP – topped up. Growth within them is tax-free with no worries about a rising capital gains inclusion rate. The tax-free account especially is a valuable tool for now and forever since income can flow without affecting your marginal rate. Never put a brain-dead GC in there, but focus the TFSA instead on equity-based ETFs. Lend your spouse money for his/her account. And your adult children (so long as they give it back).

Income-splitting: the advice oft-stated here is repeated. Establish and fund a spousal RRSP if one of you makes substantially less. Set up a spousal loan to give him/her/them/its (we are a pronoun-sensitive, modern blog) money to invest since the rate is ridiculous (1%) and no attribution is involved. Make the less-taxed spouse the investor while the higher-earner pays family expenses.

Take the cash: open an RESP for your kids and get a 20% grant from the feds each year (some provinces also give money). Apply for and enjoy CPP payments starting at age 60. It’s not worth waiting until later since  years of monthly payments can be stuffed into growth assets in your TFSA.

Have a mortgage at less than 2%? Then stop aggressively paying it off. Investment portfolios have been returning three times this amount for decades, so direct the cash there, building net worth faster (and establishing valuable liquidity). Always invest via a diversified and balanced portfolio. No individual stocks (too much volatility). No mutual funds (rapacious fees). If you fear a second wave of Covid,  quietly stock up now. Each week double the staples you buy at the supermarket. The drug store. The pet food place.

Finally, if you can’t easily pay your mortgage or the deferral is ending and your job is iffy, list the place. There’s an insane, FOMO-fuelled real estate bash going on, a better price may never arrive. Besides, you’ll trash debt, free up liquidity and shed ownership costs. By the way, rents are going down and tenants are now driving the bus.

Gold and guns? Sorry, wrong blog. Try this.