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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

May 27, 2020 | The Covid reset

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.

Source: The Canadian Press

The virus is an agent of change. The transformation of society’s happening a lot faster since the pandemic came to town. Who knew a bug could do this? Look at the headlines…

The country’s biggest newspaper – in fact a company with real estate, presses, 4,000 employees, half-a-dozen dailies and 70 weeklies – just sold for pennies. Plunging revenues, crippling debt, social media carnivores and social distancing have finished off Torstar. Dead. Kaput.

Hertz is gone. Air Canada is at 5% capacity. Porter stopped flying. Most hotels are shuttered. Airbnb is toast. Uber is crippled. The pandemic ended global travel. Concerts. Conventions. For years, maybe a generation. The stay-at-home mantra changed everything. Netflix, not planes.

RIP the office. Millions may never return. Not only are elevators now death traps and the subway a mortal threat, but open work areas are impossible. So long as the virus lives, employers may insist on masks, temp checks and plexiglass screens to limit workplace liability. And who wants to toil in an ant farm? Work is now Zoom.

Shopping? Pfft. Have you seen the lineups to enter Costco? The grocery place? How can traditional department stores survive when people have to walk in one direction and stay six feet apart? They can’t. Neiman Marcus went broke. So did J Crew, and JC Penny. Pier 1. Reitman’s. Aldo. Victoria’s Secret. Lots more coming. Online or nothing.

This is but a taste of the reset. Some of it we saw coming. Some was a surprise. Evolution’s become revolution. The pace of this is dizzying – just two and a half months of Covid have destroyed business models in place for decades, and permanently wiped out of millions of jobs. Pilots used to be big shots. Concierges were condescending. Publishers were powerful. Hockey players and rock stars mattered. Now the FedEx guy reigns. Bezos is king.

And how long can government or the banks finance the change? Eight million households are on public benefits while a million property owners miss mortgage payments. What social morass awaits us when the CERB ends and home loan deferrals are gone?

Canadian unemployment goes ballistic.

 

How do we expect the traditional real estate market to function when unemployment stays at double-digits and lenders flee risk? Look at RBC. Our largest bank this week is setting aside almost $3 billion to cover bad loans – up inconceivably from $400 million just three months ago. Its core banking business shrank 66%. And how do you think the Royal will feel about giving your daughter 95% leverage to buy her first condo?

Many can see the changes fomenting around us. But so much more looms. Be careful.

A real estate reset is also at hand. How could it be otherwise now that 20% of all the families with mortgages have stopped paying and face a big, perhaps insurmountable, hurdle in a few months? Seven in ten of those households have scant equity in their homes, with loan-to-value ratios of 90 to 95%. Credible forecasters (CIBC, Moodys. CMHC) say property values will decline over the next year – no surprise given the destruction of jobs and employers now taking place. Obviously that means lots of souls – hundreds of thousands – will be in negative equity by this time next year. Maybe by Christmas.

Will RBC (and the other guys) happily renew mortgages for people without equity? Who stiffed the banks for six months worth of income? How many households will decide it’s far batter to sell and erase debt than suffer home ownership costs while on reduced income? When the direct deposits from Ottawa are over, what then?

Already, says analyst Dane Eitel in Vancouver, the writing is writ large. “CMHC’s announcement of a 9%-18% drop from current data points basically follows my forecast I have offered for years,” he says. In his latest YVR condo report there’s only one message – get the hell out.

“We forecast a prolonged downtrend of lower highs for the reaming months in 2020 and a further decline in 2021. Ultimately the condo market will test a threshold which hasn’t been seen since 2016. Signalling that 5 years of investment will have netted an investor zero increase of equity.

“The 2015 investor with a zero equity increase will be the envy of all those who invested during the market frenzy of 2017-2018. Every Condo purchased during these times will technically be under water in the upcoming years. Investing in real estate is not for the feint of heart. I vividly recall in 2017 the line ups for presales and the amount of complaining that occurred from those who didn’t get a chance to purchase because some investor bought multiple units. Thank your lucky stars those investors. Now it is them on the hook instead of you. In the upcoming months as those pre-sold buildings are completed you can purchase that same unit at a discount. Crazy how life works out.

“We do not advise any investment purchases or even owner occupied purchases in the current market. We would prefer buyers wait until prices are much lower as the inventory increases. Supply demand factors cannot be ignored. As for the investor owners who are about to be caught in this chaotic market, our advice, sell in May and go away… for years.”

Let’s review. Canadian households entered the Covid world with record debt. Half of us lived paycheque-to-paycheque. Unemployment is now at 1930s-levels. Huge numbers cannot, or chose not to, service their mortgages. House prices are inflated. Incomes are crumbling. Leverage is extreme. Savings are scant. A payment cliff looms. So deferrals will likely become defaults, as CMHC has forecast. Real estate values, no longer supported by full employment, must decline. Sales have tumbled.

And, yes, we’ve allowed real estate to become a major pillar of the economy, as we sell each other digs at ever-greater prices with bigger loans. At least, we did.

Think about that as you walk to the corner to get a paper. Oh, wait…

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May 27th, 2020

Posted In: The Greater Fool

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