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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

August 4, 2020 | Really?

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.

The head fake continues.

This week – perhaps tomorrow – real estate boards will start reporting July stats. They will be, at least in Toronto (and perhaps Montreal, Van and Victoria) wholly detached from reality. Buyer activity will not reflect millions of people on the dole, a 13.6% local unemployment rate, close to a million mortgage deferrals, empty downtown office towers or planes grounded at the island airport (Porter Airlines now says no flights until October… or maybe never).

Against this backdrop of economic slaughter, get this: Toronto realtors this week will report last month was the best July ever. Sales were up 23% from the same period last year, when we weren’t wearing masks or leaping off the sidewalks. The number of deals was a third higher than the 5-year average and 32% beyond the ten-year norm. “Seemingly unbelievable,” says Re/Max dude Robert Ebe, who has fashioned this chart:

July madness: record sales in a dangerous time

Click image to enlarge.

So why did the better part of 11,000 buyers take the plunge in the last four weeks, pushing prices ahead by double-digit amounts in a flurry of blind auctions and bully bids? Don’t they watch the news on the Corona Broadcasting Corp, or look south and see the bug ripping through more than three dozen states, keeping the border closed for months and months more to come? How can real estate in the GTA hit new record pricing in the midst of a global pandemic with Depression-era joblessness and government benefits running out? Huh?

Ebe asks three things. Is the market in a dead cat bounce? (You throw a deceased feline out the window… it bounces… but it’s still dead.) Is this just normal coming-back? Or are we into a new era of currency devaluation and big inflation now that the government has blown everything on Covid and printed more money than God has?

Well, the reasons for July were stated here a few months ago (we told you it was coming). Pent-up demand from house-horny people who couldn’t buy in the spring (lockdown), combined with scant inventory (sellers too scared to sell) in an era of 2% mortgages (because of the virus). Boom. Up she goes.

The real question is what comes next. Was July possibly the worst month ever to spend $1.8 million on a slanty semi in a hip hood, or are all the scary times over?

Realistically, the odds are growing (sadly) that politicians may drop the hammer again with little provocation if the polling persists. Have you noticed how they kinda like states of emergency, with no legislatures sitting, no opposition leaders squawking, no question periods and lots of shiny new powers? This benevolent dictatorship is now wholly supported by a majority of Canadians. Over 80% want the key US-Canada border shut for a long, long time. A survey out Tuesday found 73% support for another wholesale economic shutdown in the event of a second wave of Covid. “Even with the economic uncertainty, Canadians are quite receptive to a shutdown of the economy again if there was a resurgence,” says pollster Nik Nanos.

Meanwhile, guess what? A second wave emerging. In Australia, Britain, Germany, California, Japan. With luck, common sense and soap we’ll avoid that here. But if clusters of cases emerge in the GTA, there’s little doubt the mayor and the premier will drop the hammer. Business and restaurants shut. Stores closed. And way more people losing their jobs – just as the CERB ends and four million are shunted onto EI benefits.

Meanwhile, the lenders – after months and months of reduced mortgage revenues – are struggling to maintain profitability, control risk and deal with bum business and consumer loans (more than $11 billion was set aside for this). Do you think they’ll be more selective about lending in a renewed pandemic? Duh.

As for employers, the last few months have sent many businesses into survival mode. If the pandemic shows signs of lasting, oh, two years, then it’s a safe bet they’ll be shedding overhead, and workers. Many economists fear structural unemployment coming out of this mess. They’re right.

And the government cannot continue to shield us all from virus reality. To date, pollster Nanos says, “there hasn’t really been a connection between businesses closing and major disruptions to the economy and Canadians’ day-to-day ability to pay bills because their government has been there to support them through the CERB. The economic stimulus for Canadian individuals has been generous, so many working-class Canadians haven’t really felt a major economic pinch as a result of the pandemic.”

It’s clear this program – which costs well over $20 billion per month – is unsustainable. Public finances are being shredded. The only long-term solution is less spending and increased taxes. That will include increased tax on land transfers, home ownership and possibly sale proceeds.

Now, let’s be clear. Pandemics are temporary. They all pass. This is not the end of normal. If you do reasonable things, the outcome will be fine. Is buying a house at a historically high price in a bidding war during a public health crisis in the middle of the worst recession since the 1930s with millions out of work and just prior to another potential economic lockdown one of those things?

You must ask?

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August 4th, 2020

Posted In: The Greater Fool

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