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April 12, 2020 | The Hammer

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.

Once upon a time, tenants paid their rent. Or were tossed.

Once upon a time, investors could borrow against their houses to buy rental units, turning idle equity into cash flow, with tax-deductible loan interest.

Once upon a time HELOCs were safe.

But that was then. This is now. It’s virus time.

Last week major banks began making it known to buy a property, rent it out and be a landlord, you’d better have cash for the 20% down payment. No borrowing from a line of credit. No gifted money. No using plastic. In the grand scheme of things, this seems like a small change. But it’s not. This is what your mom would call a harbinger.

First, tenants are no longer to be trusted. Governments, either. Unknown numbers of renters didn’t pay up on the first of April. You can be sure many more will be keeping their cash on the first of May. Thus some REITs have been hammered in recent weeks, since being a landlord is now akin to sneezing on someone’s kid.

Not only have most provinces made it illegal to boot a non-paying tenant during the current crisis, they’ve also indefinitely disbanded landlord-renter tribunals. It could be months and months – or well over a year – before a property owner can be rid of a deadbeat occupant. Meanwhile (by law) they must keep premises heated, serviced, maintained and insured. Suddenly being a landlord is a perilous occupation, rife with financial risk. And the banks don’t wish to share it with you.

Second, this foretells a hammer coming down on HELOCs. After all, it was too good to last. Canadians have borrowed more than $300 billion against their houses (not counting mortgages of $1.6 trillion), and at least a third of them pay only interest on the outstanding balance. In fact, if you used a home equity loan to buy a rental property, you never want to pay it off – since all interest can be deducted from income received, reducing tax payable.

This change is also a warning to everyone with a HELOC, whatever you used the cash for. We’re in a debtstorm at the moment. The virus has made everything worse, instantly, by throwing millions out of work. The fact 600,000 families won’t be making mortgage payments for the next six months is costing the banks about $778 million every four weeks in lost income. It’s risk-off time for the guys in the big, shiny towers at King and Bay.

Remember, lines of credit are demand loans. You can be called upon to repay some or all of your LOC – secured by real estate or not – at any time. This has never happened on a wide scale, of course. But we’ve never turned off the economy before, either. By refusing to allow lines to fund investment property purchases, consider the first shot to have been fired. That banker may be gunning for you, next.

So, third, the virus has shown – in the starkest of terms – that millions of Canadians have allowed debt to render them impotent. The bankers are exposed. Expect them to be reducing risk in future, especially as politicians and financially-pooched Canadians bumble their way to added chaos.

The feds asked the banks to defer mortgage payments. They did. Now borrowers are screaming that missed payments will be added to their outstanding balances (duh). They thought ‘deferred’ meant ‘free.’ Ottawa has also asked that credit card interest be slashed. Political leaders have clearly sided with tenants who cannot/will not pay, with homeowners who borrowed debt they cannot service plus consumers who financed lives with plastic, not income.

Ms. Virus quickly proved all those posts about people being a couple of hundred bucks from monthly misery were correct. Witness the fact over five million people have applied for the emergency monthly pogey of two grand. They lacked the resources to survive four weeks without help. Yikes.

At the apex of this are the banks. They can, and will, absorb some of this pain. But when we come out of the dark and into the sun again – in a month or two – credit will no longer flow like the mighty Fraser.

So stop this yammering about a debt jubilee, kids. It’ll be exactly the opposite.


A brief word about your portfolio. Despite massive unemployment in Canada and the US, the awful impact of Covid-19 on the US and unknown damage to the global economy, stocks have been on a roll. The gains last week were the best in 45 years, with American markets plumping by more than 12% and Bay Street following.

Are investors nuts? Don’t they know what’s happening? Over 16 million US workers out of a job in four weeks and unemployment jumping from 3% to 10% – how could that lead to an equity rebound?

Markets may well have gotten ahead of themselves and will retreat, but as the gauge of fear (the Vix) drops, the S&P 500 has rocked because (a) the bad news is old news and (b) the worse things get the more governments and central bankers will spend to prop it all up, plus (c) the virus is starting to plateau.

The four words now echoing: stay calm and go long.


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April 12th, 2020

Posted In: The Greater Fool

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