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May 5, 2020 | Stay Away

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.

This week BeeMo shocked many when the bank said it expected up to 80% of staff to stay home, post-virus. No cubicle farm. No collaborative work spaces. No elevators to floors in the sky. No gleaming bank tower. Another nail in the downtown coffin.

Daniel’s one of those financial worker bees. An IT banker dude who knows he’s not going back. “Like many others I’ve been forced to work from home for the last two months. Now thinking about the days where I would spend my lunch discussing your blog and the market with my coworkers seems nostalgic.”

By the way, the Bank of Montreal has 45,500 employees. Cutting thirty-six thousand of them loose – many in Toronto – seems like a big deal. What could this mean? Danny continues…

Since I will not be going back to my downtown office after this is over I have decided to ditch the concrete shoe box I live in. I gave my landlord two months notice and will be moving back into my parent’s house in the burbs for the time being. Instead of paying a substantial amount each month to be close to an office I will rarely set foot in I’ll be investing a lot more.

This is where it gets interesting, my unit has been on the market for three weeks and there have only been two viewings. My overly confident landlord thought he could get more than he was already charging me. He is now growing desperate at the thought of the unit sitting empty for a while. A realtor friend of mine says around the same time last year there would have been multiple offers within a week. The inventory hasn’t been this big in the last five years and it grows each day. Thanks to real estate data now being available to the public, we can see listings being pulled off and relisted because they were there for too long. As you already know this is merely the tip of the iceberg and the real blood bath will be this fall when mortgage exemptions are up.

Hmm. Remember what a certain pathetic blog has been telling you?

The downtown condo market is living on borrowed time. An anachronism. Amateur landlords are in serious trouble. The Airbnb collapse just makes it worse. Rents and prices down. Post-Covid migration will bite urban values. The mortgage forbearance crisis is coming this autumn. And the bounce summer may bring could well be a bull trap.

Unemployment of 18% in April will not be 5% in July. Or December. Or next March. Or maybe this decade. The economy is being pulled into disinflation as the structure we had a few months ago is unwound. Low interest rates are bad news. Demand will trickle back. Not gush. Governments that spent big to support people will have a right to take back much when the crisis ends. Taxes. Many businesses are not re-opening. Movie theatres, arenas, convention halls, hotel ballrooms, underground food courts and most restaurants will be empty, or close to it, for months. Or years. Mass transit – the subways of Toronto and Montreal, the SkyTrain, GO Transit system, the CTrain – will lose ridership, become uneconomic and curtail service.

What does this mean?

One consequence is the devaluing of real estate close to city cores – since those cores will have fewer white-collar jobs, workers or appeal. Why would people continue to spend $2 million for a flimsy house on a 30-foot lot in the 416 mid-town hood of Leaside, for example, when a 15-minute car ride to downtown is no longer the big draw? Move 30 minutes north and save a million.

You might have seen the April real estate board numbers by now. Sales crashed everywhere. Down 63% in Van, 67% in Toronto, 63% in Calgary, 59% in Victoria. All these boards sought to blunt current price trends in their media releases with year/year comparisons. In Toronto, for example, prices have actually dropped to year-ago levels, wiping out twelve months of gains with an April decline of 11.8%. Inventories have crashed lower as sellers recoil. The sales-to-listing ratio has plunged. There’s just no positive glimmer in these stats, even as five-year mortgage rates spiral towards the 2% mark.

These are the lowest sales volumes in the lifetime of virtually every agent and broker. No showings, no sales and virtually no market mean families have their net worth trapped inside assets which the virus has turned illiquid. If this continues, it’s a nightmare scenario for households with income stress, no reserves or liquid wealth, uncertain employment and mortgage payments set to resume in September – after the government pogey has run out. If they need to exit, will they be able?

Combine that with the potential deurbanization that the Bank of Montreal’s promulgating and you can ask: whither housing?

One scenario: a torrent of listings by late summer as financial stress mounts. Forced sales. Foreclosures. Mortgage defaults. Job loss. Wary buyers. Fewer immigrants. Risk-averse lenders. “By 2021, as the economics of housing returns to fundamentals, we expect an array of factors to result in a weaker market with some downward pressure on prices,” say the economists at CIBC – another bank about to tell people to stay home.

Meanwhile, consider Dan. No more office downtown. No more condo. Moved home to the burbs. City landlord in distress. Will probably list. Too late.

Does any of this sound temporary to you?

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May 5th, 2020

Posted In: The Greater Fool

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