August 14, 2020 | The Weird Continues

Covid diary for 14.8.20. Have you noticed how the pandemic has come to define every single aspect of life? This is now a virus blog, despite its waggy tail and wet nose. Oh well. Here’s some recent stuff you should know…

Over the hurdle

TD is the latest bank to drop its key 5-year, super-duper, clients-only five-year fixed mortgage rate yesterday. Down to 2.24%. But if you make eyes at TNL@TB, or bow slightly and ask sweetly, you can get the cash for less than two points. As we’ve been telling you lately, the cost of money has gone totally, seriously insane. Fivers are widely available at 1.97%, or even a few basis points lower. Depends on your smile (behind the mask).

Realities: this is unlikely to happen again in your lifetime, unless the virus completely eats Texas, Trump declares martial law and we fall into a continental depression. Second, you should lock in. Going variable to save three dollars a month when the cost of money is essentially free (given inflation’s progress) is hubris. Bad idea. In fact there’s logic – as was spelled out here a few days ago – in securing a decade-long loan at 2.5%, so long as you don’t move within the first five. Half a decade from now the virus will be a memory and CBs will be doing all they can to gently hike rates as they ready for the next disaster.

Another reality: cascading rates at the banks have made the federal mortgage stress test a little less stressful. It used to be at 5.19%, now eroded to 4.79%. This is the number at which borrowers must qualify in order to get their insured money, regardless of what crazy-low rate the bank is offering. The latest drop is twenty bps, which means buyers with a hundred grand income and 10% down can carry about $8,000 more debt. Not a lot, for sure. But every little bit helps fuel the FOMO now smouldering through the burbs.

By the way, the difference between the stress test rate and the on-the-street cost of a home loan is now about 2.8%. That’s huge. It means, essentially, borrowers have to prove the can carry the financing at more than twice its actual cost. The real estate cartel says this is absurd. And yet sales/prices keep going up, even in a pandemic. Just imagine if there was no test at all. Realtors would move from Audis to Lambos and be even more insufferable.

Did the virus just infect your RRSP?

So Covid threw a lot of people out of work, resulting in more than eight million taking the CERB pogey. For most, this was not their fault since politicians turned off the economy and therefore had a responsibility to cushion the blow. But it did underscore the fact families in the bottom half of the income/net worth scale have almost no financial reserves. They panic over one missed paycheque, so six months of virus unemployment is catastrophic. Many carry gobs of debt. This is why almost a million families stopped making mortgage payments. Soon both the CERB and loan deferrals will end. Pow.

But what about the years to come? Does it still make sense, despite the bug, to be squirreling money away for retirement? In your RRSP?

Maybe not.

Writing in the Financial Post this week, money guy Dale Jackson raises valid points. First, understand how RRSP tax breaks happen. This plan favours the well-to-do. The more you earn, the bigger the prize. The size of the tax break increases with income and marginal tax rate.

So, if Covid stole your income for most of 2020 to date, putting money into a retirement plan may give you a much smaller deduction than waiting until 2021 or thereafter when your job is restored. Also remember earned RRSP room never goes away. It accumulates – so a basic strategy has always been to save it up for higher-income years, to offset the capital gains on investments, or cancel out some of the tax when you take a commuted pension, for example.

If the virus hit your household, take some of that CERB cash and stick it into your TFSA in nice growthy ETFs . No tax deduction, of course, but no tax payable either when you withdraw income in retirement impacting benefits like OAS.

By the way, remember that virus payments are taxable. So you could save some, put it into an RRSP next spring when the world is less nuts, using the tax break to offset the money owing on your CERB. Or transfer some from the tax-free account to the retirement account, getting a tax break for contributing money you already owned, to pay the bill. Thanks, Justin.

Condos: going down with the CERB

Months ago when the bug arrived we told you condos would take the hit along with Westjet. And here we are. Listings are rising, sales faltering and per-foot pricing dropping. The fear (often irrational) is that communal living in a single building is germy and dangerous.

Besides, with office towers empty and millions working remotely, the meme spreads that downtowns will be hollowed-out shells for decades, while the condos clustered around them turn into swanky pigeon roosts. This is typically extreme. By this time next year those offices will be populated and streets busy. People will still want the convenience, location and uncomplicated life condos provide – but pay a premium for low-rise (where elevators are optional) while the spires go cheap.

Here are some interesting words on the Van scene from local analyst Dane Eitel, who is boldly forecasting a 30% price plop in 2022 from the high set two years ago. As in Toronto, inventory is growing faster than sales, and a buyer’s market is quickly forming – the opposite to what’s going on with suburban single-family homes.

“Still to come,” he says, “is monstrous amounts inventory to be introduced to the market from the presales. Worth mentioning is the end to the evictions ban will likely be occurring in September. While the CERB is also seemingly coming to an end, and those whose are still without work who qualify for EI will be getting less money and some simply will not qualify. None of this bodes well for the demand sector of the Condo market.”

The biggest hit, however, isn’t a threat to condos only. All real estate will be challenged when the following occur in sequence: CERB payments end. The mortgage deferral era is over. Bond yields and mortgage rates creep higher. Taxes rise to help cover massive Covid spending. The US election turns into crisis. Unemployment lingers. And remember, “The economic impact of the first shut down is still in its infancy, imagine a second shutdown and the long term effects that would hold.”

Of course, nobody listens to him. Or me. So the next hundred days will be Biblical. You know, the brimstone part.

Garth Turner August 14th, 2020

Posted In: The Greater Fool

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