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.


The head fake continues.

This week – perhaps tomorrow – real estate boards will start reporting July stats. They will be, at least in Toronto (and perhaps Montreal, Van and Victoria) wholly detached from reality. Buyer activity will not reflect millions of people on the dole, a 13.6% local unemployment rate, close to a million mortgage deferrals, empty downtown office towers or planes grounded at the island airport (Porter Airlines now says no flights until October… or maybe never).

Against this backdrop of economic slaughter, get this: Toronto realtors this week will report last month was the best July ever. Sales were up 23% from the same period last year, when we weren’t wearing masks or leaping off the sidewalks. The number of deals was a third higher than the 5-year average and 32% beyond the ten-year norm. “Seemingly unbelievable,” says Re/Max dude Robert Ebe, who has fashioned this chart:

July madness: record sales in a dangerous time

Click image to enlarge.

So why did the better part of 11,000 buyers take the plunge in the last four weeks, pushing prices ahead by double-digit amounts in a flurry of blind auctions and bully bids? Don’t they watch the news on the Corona Broadcasting Corp, or look south and see the bug ripping through more than three dozen states, keeping the border closed for months and months more to come? How can real estate in the GTA hit new record pricing in the midst of a global pandemic with Depression-era joblessness and government benefits running out? Huh?

Ebe asks three things. Is the market in a dead cat bounce? (You throw a deceased feline out the window… it bounces… but it’s still dead.) Is this just normal coming-back? Or are we into a new era of currency devaluation and big inflation now that the government has blown everything on Covid and printed more money than God has?

Well, the reasons for July were stated here a few months ago (we told you it was coming). Pent-up demand from house-horny people who couldn’t buy in the spring (lockdown), combined with scant inventory (sellers too scared to sell) in an era of 2% mortgages (because of the virus). Boom. Up she goes.

The real question is what comes next. Was July possibly the worst month ever to spend $1.8 million on a slanty semi in a hip hood, or are all the scary times over?

Realistically, the odds are growing (sadly) that politicians may drop the hammer again with little provocation if the polling persists. Have you noticed how they kinda like states of emergency, with no legislatures sitting, no opposition leaders squawking, no question periods and lots of shiny new powers? This benevolent dictatorship is now wholly supported by a majority of Canadians. Over 80% want the key US-Canada border shut for a long, long time. A survey out Tuesday found 73% support for another wholesale economic shutdown in the event of a second wave of Covid. “Even with the economic uncertainty, Canadians are quite receptive to a shutdown of the economy again if there was a resurgence,” says pollster Nik Nanos.

Meanwhile, guess what? A second wave emerging. In Australia, Britain, Germany, California, Japan. With luck, common sense and soap we’ll avoid that here. But if clusters of cases emerge in the GTA, there’s little doubt the mayor and the premier will drop the hammer. Business and restaurants shut. Stores closed. And way more people losing their jobs – just as the CERB ends and four million are shunted onto EI benefits.

Meanwhile, the lenders – after months and months of reduced mortgage revenues – are struggling to maintain profitability, control risk and deal with bum business and consumer loans (more than $11 billion was set aside for this). Do you think they’ll be more selective about lending in a renewed pandemic? Duh.

As for employers, the last few months have sent many businesses into survival mode. If the pandemic shows signs of lasting, oh, two years, then it’s a safe bet they’ll be shedding overhead, and workers. Many economists fear structural unemployment coming out of this mess. They’re right.

And the government cannot continue to shield us all from virus reality. To date, pollster Nanos says, “there hasn’t really been a connection between businesses closing and major disruptions to the economy and Canadians’ day-to-day ability to pay bills because their government has been there to support them through the CERB. The economic stimulus for Canadian individuals has been generous, so many working-class Canadians haven’t really felt a major economic pinch as a result of the pandemic.”

It’s clear this program – which costs well over $20 billion per month – is unsustainable. Public finances are being shredded. The only long-term solution is less spending and increased taxes. That will include increased tax on land transfers, home ownership and possibly sale proceeds.

Now, let’s be clear. Pandemics are temporary. They all pass. This is not the end of normal. If you do reasonable things, the outcome will be fine. Is buying a house at a historically high price in a bidding war during a public health crisis in the middle of the worst recession since the 1930s with millions out of work and just prior to another potential economic lockdown one of those things?

You must ask?