June 11, 2020 | Issues

Would you work in a warehouse in steamy Victoria for nineteen bucks an hour (plus benefits and a bonus for showing up routinely)? Yesterday on this blog Carson moaned he couldn’t find workers to do so, and that people would rather stay home on the CERB. Yes, it pays less. But the actual work involved is, well, zero.

Tara just wrote me. She has a candidate:

Will gladly sacrifice the mushroom in the basement, who has become a bit too comfy with the Trudeau re-election bribe money, to apply for this work. What’s the name of the Victoria warehouse looking for an employee? I’ve got one here. He offers expert-like finger dexterity, an uncommonly high degree of skill at commanding phantom war-like scenarios and can tolerate flashing light beams and loud blasting noises. As an added bonus, he comes with his own chair.

Thanks,
His Mother

As you may have heard, federal oppo parties (to their credit) have nixed Mr. Trudeau’s plan to extend the CERB payments. But this largesse is not over yet. In preparation, those with wealth should be stuffing their RRSPs and TFSAs, realizing tax-advantaged capital gains, setting up spousal loans and registered plans and considering a family trust. (More on this as we move towards the next federal budget.)

Now, let’s yak about the other pachyderm in the bathroom, which is mortgage deferrals. There’s growing consternation about exactly what happens when this payment holiday runs out.

The extent to which Canadians are pooched is in the stats: 8.5% of Americans during this pandemic crisis asked for their mortgages to be deferred. In Canada the latest rate is 17%, and still rising. That equates to over $180 billion in housing debt not being serviced by upwards of a million borrowers. All this money is accumulating interest, and missed obligations will be added to the outstanding principals. That’s issue #1.

As TD is warning its mortgage customers:

The deferral has increased your amortization period and the total amount of interest you will have to pay. The mortgage deferral offer is a pause on mortgage payments themselves, not a forgiveness of the mortgage payment obligation. Interest will continue to accumulate and be added to your debt. The interest will be compounded on each payment due date.

The bank offers mortgage deferral calculator to help people visualize the impact of not making payments for half a year. Good idea.

Now while overall debt will increase for those deferring their loan payments, the value of the asset being financed may drop. CMHC has famously said a decline of up to 18% in prices, nationally, could occur over the next year. Moody’s says 30%, maybe. National Bank estimates 10% which would be “sharper than any of the country’s last three recessions,” including the 2008-9 credit crisis.

The conclusion is that potentially 10% of the people now deferring mortgages could end up defaulting on their loans, especially those with a small amount of equity (which is apparently the majority of the deferrers). This would amount to 70,000 to 100,000 households. Says mortgage broker/blogger Rob McLister “That’s too big a problem for the government not to do something about.” So, this is issue #2.

Now, jobs. When are they coming back?

The latest news was good – 290,000 positions regained in May, compared to the previous month. But at the same time 490,000 more people started looking for work, so the jobless rate increased to almost 14% (it was barely over 5.5% in February). This is the worst it’s been since WW2, and Canada now has the lousiest jobs status among all major economies. Yuck. Of the jobs stolen by the virus, 10% at best have been replaced. Thus, 90% have yet to be reinstated. This will happen over time as the economy reopens (pandemics are by their nature temporary) but it will not occur in the next 90 days – when $180 billion in mortgage deferrals ends. Current estimates are for an unemployment rate of double-digits by Christmas.

But wait. There’s genuine skepticism over how valid last month’s employment stats may have been. “Whether or not you believe that Canada created about 290,000 jobs last month depends, critically, upon what fraction of those who worked no hours in May but said they were employed will ultimately return to their jobs,” says Bay Street economist Derek Holt. Three million people claimed to be ‘employed’ when they actually worked no hours last month. Figure that out.

How many now unable to pay their mortgage will still be struggling in November? We have no idea. But it’s logical to think the number will be significant enough to impact local markets as these folks decide the best solution is to list and sell. So, issue #3.

Finally, the Big Banks just gutted profit margins by setting aside $11 billion to cover bum loans, including those now being deferred. They’re not happy about this. Nor is this whetting the corporate appetite for risk. Just the opposite. Odds are the days of money-for-all mortgage approvals feeding a real estate FOMO frenzy are over.

So after you’ve told your lender the virus caused so much financial distress you couldn’ make payments for six months, do you really believe that will be forgotten? Unrecorded? Omitted from your file? Not a consideration when renewal or refinancing time comes along? Maybe the Tooth Faerie lives in your garage, too, and she can explain. It’s issue #4.

Free money to live on and mortgages without payments. What a country.

Next stop, reality. Bring your chair.

Garth Turner June 11th, 2020

Posted In: The Greater Fool

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