August 5, 2020 | Moral Hazard

As goes 416, so goes Van. The latest housing stats from YVR echo those in Toronto, where sales have jumped more than 20% from last July, despite the fact last summer there was (a) no pandemic, (b) no CERB, (c) no mortgage deferrals, (d) eight million people still had jobs, (e) your office was still open, (f) nobody wore a mask, (g) only a crazy person would believe the federal deficit would be $450 billion and (h) you didn’t know what what a “WE’ was.

Wow. So many changes. So much to go wrong. Nine thousand Covid deaths in Canada, Lockdowns. Airlines grounded. No tourism. Depression-era unemployment stats. A recession. And, yup, FOMO – driving house sales nuts form Halifax to Victoria.

Once again we’re reminded of a truism on this blog from years ago: there’s an inverse relationship between interest rates and real estate. When one goes down, the other one goes crazy. This year, especially, when the contrast between an orgy of buying and the economic destruction the pandemic has caused is acute.

Well, there’s more coming. A significant national lender has now broken the 2% barrier for an advertised five-year fixed mortgage rate. Quietly the major banks have been handing out such loans at around 1.98% (or a little less), while their official posted rates remain higher. But Tangerine has dipped to 1.99% (although it’s a collateral mortgage). As mentioned here the other day, 10-year money has also been eroding in cost, with a decade-long mortgage now available at a little over 2.5%.

So does this make variable-rate mortgages unwanted?

Mostly, yeah, it does. VRMs might be had for a couple of basis points less, but why bother? A fiver at these prices means your loan rate will almost certainly be lower than inflation in the years ahead. That’s akin to free money. So this generational, virus-induced collapse in the cost of home loans is exactly why we have a real estate boom in the middle of a health crisis. That, plus the fact the spring market was pushed into July.

Not only are fixed-term rates equal or less than the cost of a variable-rate loan but (a) they are likely to drop further (a little) as central banks pump out stimulus and drive bond yields lower, and (b) this won’t last. When Covid fades as vaccines arrive, those CBs will be raising rates again to offset the ridiculous accumulation of debt they’re causing. Borrow today at 1.9% and look like a Nobel economics laureate in 2024. Easy to get dates then.

So will this boomlet last?

In a blog post this week, then in a Toronto magazine article, my answer was ‘no.’ Of course not. Cheap mortgages combined with pent-up demand and low inventory is realtor catnip, but we continue to face strong economic headwinds. Unemployment will still be double-digits by Christmas. Mortgage deferrals will come to an end. CERB is turning into EI – which has a negative footprint on credit/employment histories. The airlines, tourism, entertainment, hotels, sports, live entertainment, bars, conventions and trade shows – all these sectors have been hobbled and will remain so as long as social distancing is in place and pandemic fears rage. It was interesting some industry rockstars attacked me for saying such things. Moral hazard, I guess.

So what about a second wave?

No idea if it’s out there, or just media fiction. But we do know most Canadians are freaked out about Covid, unwilling to see the border open, suspicious of eating out and terrified of flying. The masks everyone now sports are visible symbols of a surrender to fear.

In this environment, the sales and price stats bursting out of the major centres (except those in Alberta, Saskatchewan, Manitoba, NB and the Rock) look like aberrations. Buyers are certainly embracing risk. And it’s not over yet. As infections spread in the US and the gong-show presidential election approaches, bond yields could fall further taking mortgage costs with them. Not a lot. But enough to hook more buyers and jack up values.

Amazing. A 13% unemployment rate and record property prices. Something has to give.

By the way, a recent Edward Jones survey found the pandemic is sinking retirement plans for a lot of folks in their 50s and 60s. They’re diverting income to supporting their Millennial offspring, and lack enough savings – since most net worth is in real estate. The median nestegg among members of this cohort without a corporate pension plan is… wait for it… just $3,000.

That’s what real estate does. The illusion of security.

Garth Turner August 5th, 2020

Posted In: The Greater Fool

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