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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

April 16, 2020 | Smile

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The results were a shock.

In the midst of what can only be described as economic rubble, 30% of Canadians say they shouldn’t return to work until the virus is gone. Gone. No new cases. Another 20% want to stay home until there’s a vaccine. Whenever. A quarter would return to their jobs only when there’s no pressure on the health care system. Just 6% want to work now. So says this week’s Leger poll.

Conclusion: at least half the country is cool with sweatpants, Netflix and government pogey. Wall-to-wall media virus porn and politicians making the most of a crisis did a bang-up job of scaring the poop out of folks. And now they’re being paid to stay home.

Since this is not a virus blog, we won’t talk about the flattening curve, the under-utilized hospital emergency rooms or the way a bug ate our civil liberties. History will judge this pandemic against all those in humanity’s past. And it likely won’t be proud.

Let’s focus instead on what comes next.

Job losses and economic decline are without precedent. In four weeks 22 million Americans became unemployed, wiping away 10 years of growth. The jobless rate went from 3% to 17% in a flash. Retail sales have crashed. It will takes years for this to recover, which is a big deal since 70% of the US economy is based on consumer spending.

The good news is that America’s a highly-diversified behemoth with deep pockets and a presidential election in seven months. Once virus restrictions are eased in May the snap-back in GDP will impressive, even if the jobless rate stays in double-digits until next year. The expectation of this is why stock markets have reclaimed a lot of the ground they shed when the virus arrived. In six months investors will be happy they sold nothing in the storm.

But Canada is not America. There are two things we need to fret over. Oil. Houses.

World crude prices were below $20 US again Thursday. Demand has been destroyed by the impact of the virus as governments in many countries turn off their economies. The situation is the most dire in 30 years, and for Canada it’s a blow. Oil is our biggest export. Alberta is fatal. So much for those Wexit guys.

As for real estate, it’s hard to overstate the negatives – and this sector is a bigger hunk of the economy than energy. Household debt is off the charts, at an historic high. We owe more than the Yanks did when their real estate collapsed. Legions of people bought houses with 20-times leverage, and even with rock-bottom mortgage rates they are now hurting. Over 600,000 households – representing 12% of all bank mortgages – have asked for payment deferrals. Airbnb has collapsed, which will force tens of thousands of units into the rental pool – dropping lease rates – or onto the open market, diluting prices.

In Toronto half of all condo sales over the last decade have gone to speckers and amateur landlords. Yet 40% of those owners lose money every month and hang in just to secure capital gains – an illusion now. In Vancouver 45% of homeowners say they won’t be able to keep making mortgage payments and a growing number believe property taxes will also go by the wayside. As a result the city’s mayor is talking bankruptcy. Imagine what they would do to civil service defined benefit pensions.

Almost 30% Canadians are on government benefits, including millions with no cash and all their net worth in property. It’s worth remembering the American market cratered when just 8% of homeowners got into financial difficulty. So if politicians and public sentiment keep workers from working for another two or three months, we need to seriously assess the risk in real estate.

Then there’s tax. Somebody must pay for the $200 billion in excess government spending the pandemic is costing as Ottawa pumps out the cash. Already the rich face a 54% top marginal rate, and their ranks are thin. The greatest pool of untaxed wealth in the country is residential real estate. How much longer can that remain the case?

Well, you can mull these concerns with me, or suck on the soma realtors are dishing out.

Says ReMax: “The COVID-19 outbreak will be a tough, but temporary blow to the Canadian housing market. As Canada collectively presses pause on the economy and our lifestyles, real estate demand and activity will temporarily take a seat. The bounce-back of the national housing market, however, is projected to be strong. A cooler Spring, a sizzling Fall.”

Says Royal LePage: “From our experience, we are not expecting significant year-over-year price changes in 2020. Home price declines occur when the market experiences sustained low sales volume while inventory builds. Currently, the inventory of homes for sale in this country is very low, matching low sales volumes as people stay at home. It is easy to mistakenly equate a handful of transactions at lower prices to a reset in the value of the nation’s housing stock. Distressed sales that occur during an economic crisis are a poor proxy for real estate value.”

There. Is everything clear now? Unprecedented economic destruction. People in no hurry to work. An historic debt crisis. Six million on the dole. But house prices will be higher.

At least we still have a sense of humour.

 

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April 16th, 2020

Posted In: The Greater Fool

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