Herd immunity

Remember the words posted here weeks ago about the coming condo collapse? Well, presto. It’s here. At least the beginning. Right on cue.

For example, a one-bedder unit just steps away from the sky-darkening bank towers at King & Bay in the Big Smoke was commanding $1,200 for each of its six hundred feet in March, before Covid came to town. This week? That’s down to $785 a foot, which is a fat 34% discount from the market value just seven months ago.

But there’s more. Says the listing agent, desperately: “***Seller Will Pay 6 Month Maintanence Fees If Sold By Oct 15,2020***” (realtor spelling, not mine). That monthly condo fee, by the way, is $800. So knock another five grand off the price.

Bottom line: a fully-renovated, low-rise unit in a great building in a hot location that commanded $720,000 pre-virus is now on the market for $480,000. Odds are the seller is a dude who was renting it out for two hundred a night as a perfect downtown Airbnb unit (now illegal) or soaking $2,250 a month from a young legal secretary in a gleaming skyscraper who’s now WFHing in mom’s basement in Ajax.

And rents? Pshaw. As we told you, there’s already been a 15% reduction in the cost of leasing a condo in Toronto, with rates now eroding in Vancouver and Montreal where new condos are starting to come online and listings pile up. Too much supply, not enough demand. It’s classic.

This week the global financial press started to take notice. “In the world’s big financial centers — from New York to Toronto to London to Sydney — rents for inner-city apartments are plunging,” reports Bloomberg. “International students who normally bolster demand are stuck at home and young renters — the most mobile group in real estate — are finding fewer reasons to pay a premium to live in what is, for now, no longer the center of things.”

Everywhere, a similar story. Demand has been eroded by an abrupt halt to immigration, the shuttering of major office complexes, the meme that workers will never have to go downtown again (amusing), cities curtaining mass transit, a reduction in Airbnb’s toxic presence, uni students learning online plus a flowering of the suburbs and real estate with front doors and back yards as work-from-homers crave more space and fewer germs.

Meanwhile supply is erupting as new residential complexes come to market, negative cash flow crushes amateur investors, short-term rental hosts have no clients and the tenant pool dries up along with jobs in restaurants, bars, clubs, hotels, offices and downtown retail outlets. (For example, sales are down more than 90% for stores and services along the Path – that glitzy 30-km-long underground complex beneath the pavement in Toronto.)

“With remote working in vogue for everyone from banks to tech companies,” adds Bloomberg, “and the quirky shops and bars that made living in a city fun curtailed, the equation about where to live is changing. And so is the balance of power between landlords and tenants.”

Exactly.

So, there are some lessons here.

Like never get caught up in FOMO. For the past few years urban DT condos have been hot properties as thousands of units hit the market at ever-rising prices and ever-smaller footprints. In a place like Toronto most were bought from plans in the pre-con phase, at least half by people who never intended to occupy them. Even with competition among tenants, those big mortgages and high ownership costs meant more than 40% of all landlords were losing money. So long as valuations were increasing, the suckers were willing to eat the loss. But now? Whoops.

Lesson: buy stuff that makes money. Speculation can kill you.

Another one (very radical): buy low, not high.

People flocked to condo investments because (a) financing was cheap and easy to get, (b) they like the overlord feeling of being an landlord, extracting rent from serfs, (c) real estate values always go up while financial assets are risky and (b) everyone else was doing it. In reality, landlording costs usually exceeded income, any net profit was 100% taxed and because most people bought into a rising wave, they’re now being Hoovered.

But I know this takes courage. To resist the crowd’s siren song when an asset is expensive, inflated, sexy and aroused. And, equally, to buy things that are unloved, declining, deflating, cheap and flaccid. Today the crowd is storming Hicksville, jacking values of dodgy houses in cities where commuting downtown is impossible and/or suicidal. Also today we have a 34% drop in the value of prime downtown units amid the belief that what happened over the last eight months will set the scene for the future. Forever and amen.

Apparently the herd never learns. And thank goodness for the rest of us.

When the party ends

Aren’t you tired of Millennials? Whiskers, tats, bicycles, house lust, skinny pants. Yeah, me too. So let’s talk about old snort issues for a few minutes. Like how to get money out of your investments without being nuked by the virus or taxes.

Joan, in BC, throws us this question.

We have a financial advisor and a friend who is a retired financial advisor, each giving us different advice. We were wondering if you could help us decide the best action to take. I’m 67 and retired. My husband is 66, still working, and intends to do so until he’s 71. We started receiving our OAS and CPP pensions at 65 and receive a federal government pension as well. We have no mortgage and no debt and our lifestyle is pretty frugal. We have approx. $327,000 invested, TFSA’s and spousal RRSP’s mostly in Spousal, since my income is much lower.

Our retired advisor friend thinks that with the instability of the markets, Covid, etc. we should seriously consider converting our RRSP’s into either a RRIF or an Annuity now, instead of waiting until age 71. Our current advisor disagrees, since we are well balanced and diversified and weathered the drops in March pretty well. Also, he said Annuities are paying lousy returns right now. We feel since a RRIF is subject to market fluctuations, what’s the point and also we don’t want to add to our income, since it would push us into a higher tax bracket. What do you think Garth?

Easy, you need new friends. Your advisor’s correct.

Now let’s make sure everyone knows the difference between an RRSP and a RRIF. Plus the tax changes that came down recently. During your working years contributing to a retirement savings plan nets you a tax break since the annual contribution can be deducted from taxable income. Cool. Do it. RRSPs are great tax-shifting tools and can also be used when you lose a working gig, get pregnant, buy a house, go back to uni or want to take a year off to find yourself (good luck).

RRSPs (like tax-free savings accounts) are not products or things, but just accounts into which you can dump different investments. Growth is tax-free, so it makes sense to hold things that will swell in value (like equity ETFs) as opposed to brain-dead, interest-earning duds (like GICs).

But the RRSP party ends at age 71, when these holdings must be converted into accounts (called RRIFs) that pay income. And, yup, it’s taxable. Now the good news is, thanks to Covid, the feds have lowered the minimum amount a RIF must pay out annually, by a whopping 25%. So now at age 72 only 3.96% of what a RIIF contains must be converted into taxable income (this rises to 15% by age 94, should you be so wirey). That means almost all of the RRIF investments can continue to grow free of tax for a long, long time.

Okay, back to Joan. So, yes, an RRSP can be converted to a RRIF at an earlier age, if you want. And once that happens, income must flow (through a slightly different formula) and be taxed. But why do this? There’s no rule preventing a person from taking RRSP money if they need income.

Her retired advisor friend should stay retired since converting a retirement savings plan into a retirement income fund doesn’t reduce risk one iota. It just means taxes are payable on withdrawals that (in this case) aren’t needed. As for an annuity – which locks the money up in return for a guaranteed monthly stipend – the worst time possible to get one would be now. Annuity payouts shrink along with interest rates, which these days are in the ditch.

Advisor, 1. Friend, 0.

$     $     $

Well, here’s an interesting chart. HouseSigma figures Toronto condos have never dived this deeply, or quickly, into a buyer’s market.

Things grow darker weekly for all the amateur landlords and specuvestors who snapped up mini-units of 500 square feet or less over the last few years. The vacancy rate is going up, rents are going down, condo prices are falling ten grand a week, listings are piling up (200% more in a year) and both tenants and purchasers are scarce.

Word is that some mortgage brokers are about to stop lending any funds against these things. Meanwhile thousands more units are coming to market as existing projects are completed. There are oodles and oodles and oodles of assignment condos available as investors bail. And look at the latest Covid news – as of this week  no more open houses in Toronto or most of the GTA, the condo heartland of the nation.

Well, come winter, the growing second virus wave, a lot more mortgage defaults and risk-averse lenders there’s every reason to think the glut will worsen with prices caught in a vice. It will be a painful lesson for investors who thought losses were impossible and there’d always be some kid willing to shell out $2,500 a month to sleep in their closet.

Of course, the city will come back. The pandemic will end. Downtowns will seduce, entice and intoxicate once more. So have the chequebook ready.