Entries from September 2020 ↓

Feeling ill

Wow, whadda week.

The Confidence Man

In Ottawa the big confidence vote may be called. It’s now a nothingburger, since the Dippers won everything they demanded of the Libs. The CERB is back and being extended for as far as the eye can see – although it’s called different names (enhanced EI and CRB). Does this sound like a guaranteed income to you? It should. Plus Jag got the feds to agree to two full weeks of sick pay. That’s extra sick pay over your deal with your employer. It was an NDP prerequisite for backing Trudeau when he disbanded Parliament earlier this year, and it’s now a done deal.

So, no election. Yet. The spending will continue. We are on our way to a $500 billion one-year deficit. Harper’s credit crisis x 10.

By the way, speaking of ten additional paid sick days, it’s useful to remember how many public-sector workers are already paid for time away from their jobs due to sniffles. For example, this is the deal for elementary teachers in Ontario (who work 194 days per year, or 53% of the calendar):

If you are employed in a permanent full-time position, your sick leave entitlement each school year is as follows:
* 11 sick days at 100% of salary;
* 120 short-term leave and disability plan (STLDP) days at 90% of salary; and
* “top-up” of the STLDP days from 90% to 100% of salary from any of the unused 11 sick days of the previous school year. (Source: Ontario Elementary Teachers Federation)

Yes, this is where we’re headed. No wonder there’s a tax storm on the horizon. Plus this storm…

Blood & Guts in Cleveland

It probably won’t be pretty, but it will be seminal. The first presidential debate between Trump and Biden happens tomorrow night (Tuesday) in that city on Lake Erie’s shores. The first of three. So who has the most to lose?

Trump, of course. And not just his embarrassing tax records. He’s spent months painting Joe Biden as old, incoherent, doddering, senile and suffering from dementia. This happened after trying to portray him as a player in Ukrainian corruption and, when they failed, as a pedophile. In any case, expectations of Biden are now so low that if he shows up and stops drooling, it’ll be a win for the Dems.

I have no idea who will win this election, unlike everyone else who reads this pathetic blog. But we can expect mayhem. Trump has worked hard at discrediting the electoral process. He claims (without evidence, according to the FBI) that mail-in ballots are a sham. (There will be million so them, thanks to Covid.) He’s suggested that Congress, or maybe the Supreme Court (hence the haste to appoint the new gal) – and not voters – will decide the outcome. And he’s refused to say he will gracefully exit in case he loses.

Sound like a mess in the making? You betcha. This will not be decided on November 3rd, and Mr. Market could be in a crappy mood until Christmas. Meanwhile the social media onslaught is overwhelming. We have Proud Boys battling BLM. Guns are coming out. America is battling not only a virus but an infection of intolerance, polarization and hate.

Suddenly Canada doesn’t look so bad. And we get free money….

We’ve hit 1%. Seriously.

So a one-year, fixed-rate, high-ratio, insured mortgage is now available for 1.29% in most of the country. When did this happen last? Never, silly. It’s an all-time low number reflecting the fact our central bank has artificially depressed yields by buying up $5 billion a week in government and mortgage securities.

The times are unprecedented. While a 1% mortgage for sounds progressive, borrowers should realize it comes because of the risks facing the economy. There are four million people this week lurching from CERB to new government pogey. Unemployment in Canada is the highest in the western world. Our per-capita government sending is off that chart. The central bank is printing cash as never before and feeding it to a government that spends without precedent. Notably, almost 70% of all the people who stopped making mortgage payments because of Covid had yet to resume as of the beginning of September.

Should you take a one-year term? For most people, no. Go five. Not worth the risk. Of course, if you really want to be shellacked, go get a five-year bank GIC. The Royal’s paying 0.95%. Remember these days. Your grandchildren will want to hear about them.

Tell me why

Shortly, we’ll dissect Arnie. First, a few hungry little harbingers.

One. More evidence WFH is not a thing. Not an enduring one, anyway. Next Monday a third of Citi’s 17,500 New York employees will be at their desks on Wall Street. Bank of America managers are back on October 21st. JP Morgan began a staggered return last week. Odds are within six months most of NYC’s 350,000 finance workers will be ensconced in their ant farms, busy rebuilding the office culture, making boodles of bucks for their banker bosses.

In Canada? Well, we’re Canadians. Things take longer since we have to emote. But there’s no doubt the office towers will repopulate, that CIBC will want to move into its spanking new DT Toronto head office and the 30 km of underground commerce (where five thousand people work in stores, spas and eateries) will seed back to life.

Two. Unsold condos in Toronto are piling up faster than borrowed billions in Ottawa. Supply and demand have fallen out of whack. There are meaningful reasons for this. First, too many units are flooding MLS because of Covid fears (elevators), new completions, student and restaurant renters moving home into Mom’s basement, the silly ban on evictions and the collapse of tourism, travel and Airbnb. A mass of investors are dumping their condos, sick of negative cash flow. (As this pathetic blog told you already, this will be a temporary – and significant – buying opportunity if downtown ownership is your thing.)

But wait, demand’s also petering. It’s evident everywhere except in the media and lagging realtors stats. Look at this…

Three. September was a shocker in Vancouver, for example. Compared with August (the market peak) condo sales have fallen 51% while detached deals are off 46% from last month. Ditto for townhouse transactions – down by half.

A recent RBC report seems to have nailed it – all that pent-up virus demand from the spring, unleased in late summer, is done. It’s over. The greater fools blew their wads, borrowed massively, paid inflated prices, and are now done. The market’s momentum, the bank told us a few weeks ago, will dissipate in the autumn. No now it’s fall, and the bubble is leaking.

Badboy housing guru Dane Eitel says the same. “CERB is coming to its conclusion, the deferred mortgage program is ending, and evictions have returned, now let’s see where the market will head on its own volition. Hint, down she goes,” he says. Inventory is growing, and average detached prices will drop about two hundred thousand.

Well, it’s time for Arnie. How does all this fit into the desires of a Toronto renter dreaming of suburban dirt?

“Me and my wife are 31, and we just had our first child three months ago. We have a family income that’s upwards of 200K, and enough for a 10% down payment on a semi-detached in the suburbs.

“I’ve put off buying for about 18 months and I agree with all of your analysis, and I do believe Canadian economics and real estate are a ticking time bomb. However, the government seems intent to keep real estate prices high, even if it means they have to sink the entire country to do so. To hell with jobs, fiscal prudence, taxpayers, stocks, and everything else that’s productive, as long as homeowners can make a quick buck when they sell their houses.

“If I rent for another 3 years at $2500 a month, I’ll be $100,000 down the drain. I’m unable to believe that a house that costs $800,000 now will cost less than $650,000 in 3 years, as that’s the reduction that will be necessary for me to not make a purchase right now (I’m not building any equity on rent, but some equity will be built on ownership). Why exactly do you say that we still shouldn’t buy? Please let me know.”

First, Arnie, do what you want. Never use this blog as a reason or excuse for personal action. That’s just too convenient.

But we have to ask some questions. Like, why are you suddenly house horny, in the middle of pandemic, recession, economic uncertainty and real estate inflation? Is it because of FOMO, or the fact you have a baby? Not good enough. And with an income of $200,000, why do you and your wife have but $80,000 in liquid assets? Now with a baby and mat leave, won’t it be even harder to save and invest? Isn’t your greatest obligation the kid? If you can’t save much when renting at $2,500 a month, how can you build up an RESP, for example, when she’s not working and you take on the burden of a house? Have you thought this through, Arn, or was this note written at night by your hormones?

For example, do you know the cost of ownership? A semi selling for $800,000 in the burbs comes with $25,000 in land transfer tax (kiss that goodbye – ten months’ worth of rent) and closing costs. Mortgage payments, property tax, insurance and the lost gains on your down payment come to $4,290 a month – a 71% premium over rent. That’s almost $65,000 over three years, or closer to $75,000 if the monthly difference were invested in TFSAs and an RESP. This would double your liquid assets, while buying would reduce them to zero. All of your eggs would be in one place – half a house on some soulless cul-de-sac where it takes a lire of gas in the minivan to fetch a litre of milk from the distant superstore.

Have you thought of the risks, A? What if the virus gets worse, the economy stutters longer and you’re laid off? Or lose your job entirely? Perhaps your spouse will want another child, another 12 or 18 months of maternity leave on EI without salary. Maybe she will wish to stay home for a few years with the kids. What happens if interest rates rise modestly and your mortgage payments increase by half (or more) upon renewal? What about being called back to work in the city, facing a two-hour daily commute? And what do you do if the guy living in the other half of your house turns out to be Covid-positive? Or joins a gang of geriatric Harley riders that he invites over every weekend? Or smokes dope all day on the shared back deck? Or is merely a jerk?

The main question: should a couple with just eighty grand saved and a new family buy a $800,000 asset with $745,000 in revolving debt, putting all of their wealth in one asset with no reserves, contingency or backup? In a pandemic? How is that not gambling?

Sheesh, Arnie. You came, you read, you were prudent. Now stop thinking with your pants.