March 25, 2020 | Houseageddon?

Amidst the mayhem, quarantines, self-flagellation and bored, isolated workers chugging hand sanitizer, some people are still buying houses. But not many. In fact, the real estate market is going down for the count as the economy commits group suicide.

Here’s the latest:

• Real estate boards all over everywhere have basically banned open houses. Good thing, because nobody’s going anyway. Even private showings are evaporating as sellers recoil from germy buyers. The latest stats from Van and the GTA show a huge crash in showings over the last week.
• Listings are also dropping, as terminations are requested. Even in Calgary, where things are more terrifying than an Adele concert.
• Mortgage brokers are seeing scores of approvals rejected or overturned by lenders. Why? Layoffs, job loss and income vaporization. A million people just applied for EI in one week. Never happened before. Fifty per cent of businesses say they’ll be laying off. GDP is going down by maybe 20%. Also a record. Would you approve a new mortgage right now?
• The above means deals will start falling apart soon as buyers who thought they had approved mortgages find out otherwise when closing day approaches. Sellers have every right to keep the deposit and sue for damages and future losses. Buyers beware.
• Mortgage rates are going up. Why, when central banks are slashing? Because of credit risk (see the above bullet points). Rates have inflated about a quarter point, and you can be sure there’s more to come.
• Appraisals have gone bust. No more on-site visits, and few drive-bys. So appraised values are reduced, making it harder to get a mortgage approved, or a renewal.
• Bank call centres are melting down, and the main online tool mortgage brokers use has been on the fritz. Quelle mess.

Now what about this mortgage deferral thing? How does it work and do you qualify?

If your mortgage is not insured by CMHC, get in touch with the lender and explain your circumstances. That simple. Most will let you skip one payment anyway (no questions), but if you opt to defer six of them, job loss or layoff will have to be substantiated.

This means half a year of no monthly. But it doesn’t mean you live for free. The interest accumulating on your mortgage is added to the amount outstanding, plus there is interest charged on the interest. “This means your mortgage balance will increase,” says RBC. “Your payments won’t change during the term of your mortgage. Instead, at renewal your monthly payment amount increases to account for the higher balance.”

The bank also makes this point: “Using Skip-a-payment may significantly increase your interest costs over the life of your mortgage, so it’s important to carefully evaluate your financial situation and priorities before exercising this option.”

For mortgages insured by CMHC you don’t need to prove Mr. Virus stole your job, and lenders are basically prohibited from taking legal action against defaulters. But the same terms apply – missed interest is added to the outstanding balance that ultimately must be paid.
And then there’s this:

• Keep your rent. That movement is growing faster than Covid cases. There are calls for a national rent freeze, and apparently a ton of tenants who simply won’t hand over their stipend on April 1. You might have noticed the no-rent guys posting their strident stuff in the steerage section of this blog. It’s all laid out here.  Says a regular blog dog, “Sadly, the attack the ‘rich’ movement is becoming more and more tangible and it’s more challenging to be a landlord each day.” You bet. And this is one reason investing in income real estate is a really, really, really, really bad idea. These folks are nuts. And T2 will probably cave.
• Now, Airbnb. It’s collapsed. Bookings have plunged along with travel. Just like hotels (now at 5-10% occupancy) this is doomed to near-zero revenues for months to come. Maybe years. Those who bought condos or houses to rent out for fat profits are now looking at fat losses. No wonder thousands of units will soon flood the market, pressuring prices. More bad news for amateur investors.
• And speaking of condos, yuck. Who’s going to spend seven hundred thousand for a shoebox unit in a downtown tower that now feels like a science experiment? Elevators, hallways, garbage rooms, foyers, security doors – every space outside your apartment is a battleground. Do you really want to trade germs with that deviant down the hall? Nah, didn’t think so.

Well, there ya go. All factors influencing the market now, and likely to do so over the months (perhaps years) to come. Balanced against that are low rates and cheap mortgages, plus the hormonal urges that make people do strange things.

The bottom line: housing is toast. If unemployment hits 15% (it will) and the economy shrinks by an equal amount (likely), credit risk will rise, home loans get more expensive, banks grow risk-averse and buyers retrench. All this will pass in time, of course, but after an adjustment in prices. And not up.

Garth Turner March 25th, 2020

Posted In: The Greater Fool

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