May 28, 2020 | How it Ends

Some years ago, when this blog was still pithy (instead of just pissy) we summed it all up this way: the rich hold assets. The rest hold debt.

Well, the virus sure has underscored that piece of news. Since hitting a panicked low in the third week of March, the US stock market has careened higher 39%. In nine weeks. Stunning. In fact if you went to sleep a year ago and snoozed through the entire global pandemic mess, awakening this morning, you’d think equities just had a great 12 months – up 11.2%.

Balanced and diversified portfolios have restored most or all of their value, despite crashing interest rates hurting fixed income returns and the virus rattling REITs. Oil prices have come back from the grave. Commodity prices have revived. Volatility, as measured by the Vix, has cratered by more than half. So the gauges of fear are being turned off while the measures of confidence are soaring.

This is Bay Street. Wall Street. It’s not Main Street. One thing we told you Covid would do is widen the gap between investors and borrowers, between those who own real assets and those who hold financial ones. Endless buckets of liquidity from governments and central bankers have flooded capital markets, created demand for tradable securities, floated the bankers and backstopped corporate woes. As a result, stocks are up. ETFs based on them are peachy. Credit is flowing normally. And all the grief the virus brought has been dumped on the shoulders of others. Deficit-addled governments. Millions of newly-unemployed. Hundreds of thousands who can’t pay their home loans. Besieged small businesses. And, soon, mortgaged homeowners.

This week an interesting war’s played out. Re/Max marketing dudes on one side. The country’s housing agency on the other. The realtors insist housing markets will revive fast from Covid, that prices have so far held steady and a limited number of new listings will keep it that way as buyers stream back from their social distancing. CMHC boss Evan Siddall is warning talk like that’s irresponsible, dangerous and misleading.

“Some vocal real estate advisors have labelled us ‘panic-inducing and irresponsible,’ saying essentially that house prices don’t go down. They’re whistling past the graveyard and offering no analysis,” he Tweeted. “Please question the motivation of anyone who wants you to believe prices will go up (yes, up) with our economy in slow motion, oil being given away, millions of Canadians on income support and a greater % of mortgages not being paid than we’ve seen since the Great Depression.”

Yesterday this pathetic blog listed some of the reasons Siddall makes sense, and Re/Max blows smoke. When the people who have given up are counted, the jobless rate is 20%. Almost a million families can’t, or won’t, pay their mortgages. The savings rate is below 1% and four-in-ten households went into this mess living paycheque-to-paycheque. Unemployment is not going back to 5% by Christmas. Or even next Christmas. And look at bank earnings reports this week – one after another the big guys are setting aside massive amounts for bad loans while revealing a crash in profits. The appetite for risk is falling by the hour. People who can’t pay their mortgages are credit risks.

The Main Street economy is in dogawful shape thanks to politicians who killed it, then paid people not to work. Jobs won’t coming back soon. A third or more of all small businesses will not reopen. Restaurants can’t survive on 50% social-distancing capacity. The tourism season is finished. Hotels dying. Convention hosts, hockey players and rock stars living under bridges now that the audiences are gone. And how many part-time gigs disappeared when the Calgary Stampede, the PNE or the Ex in Toronto were scrubbed?

What Siddall is saying is that those who claim real estate’s immune from this are delusional. Or worse. They’re lying. Houses sell to people who have (a) jobs and (b) access to credit. With unemployment likely to stay at double-digit levels for a long time, and the banks under historic pressure to reduce risk and cleanse their loan portfolios, how are we going back to peak house?

Sure, seriously reduced supply and greater-fool demand will keep prices aloft for a while, but the yellow flag is out. CMHC issued a special warning in the last few days for first-time buyers. If prices fall – even modestly, it said, the indebted will be creamed.

But we already knew that.

Garth Turner May 28th, 2020

Posted In: The Greater Fool

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