August 25, 2020 | Why They Buy

This week the cowboy running our federal housing outfit raged on Twitter against a twit realtor. Well, to be fair, Owen Bigland actually has an outsized opinion of himself. The Vancouver agent has a blog, a book, a degree and boasts he’s been a successful life-long real estate investor. But that don’t impress Evan Siddall much.

So when Bigland tweeted this…

Many people miss the leverage factor in RE. Buy a condo for $500k with 10% down. 3 yrs later that condo has appreciated to $550k many look at it as a 10% return when it’s actually a 100% return. Leverage is how true wealth is built. You need to get your money working.

…Siddall fired back with this…

Sigh…Because in your made-up world, house prices only go up. This kind of investment advice is like selling penny stocks because they’re cheap/. You DO realize leverage works just as powerfully when prices go down… or were you not alive on 2008-9?

Ouch.

Well, the dude has a point. Realtors who pump real estate as a 100% speculative investment, and are careless about promoting 10x leverage deserve a reaming from time to time. Yes, property prices fluctuate (just like stocks), so when you buy using big piles of borrowed money, risk is seriously enhanced. A sane or prudent person would only do that when conditions were ideal.

And what are the current conditions? Let’s recap.

• A global pandemic. 820,000 dead
• No proven therapies or approved vaccine
• Authorities bracing for a second wave
• The worst  economic downturn since the 1930s
• Structural unemployment
• A crash in immigration
• Closed borders
• Millions surviving on government handouts
• Hundreds of thousands deferring mortgage payments
• Civil unrest and political instability for our major trading partner
• Historic debt. Epic deficits. Austerity and taxes likely.

But you know what’s happening. So does Evan. Canadian real estate – especially in markets like Toronto, the 905, Ottawa, Montreal and the Lower Mainland – is hot stuff. Because there was no spring market (we were all going to die, remember?), demand was uncorked in the summer even as the economy tanked. Low mortgage rates and emotion have combined to create a property boom in the middle of a recession, even as the government scrambled to keep the lights on. Amazing.

Says a new report from LowestRates.ca: “The coming reality check could be a painful one. It’s very hard to say right now if the blistering house price gains we’ve seen in the past few months will continue into the autumn and winter season. That’s when the market will really be tested. The overall economy is continuing to struggle with elevated unemployment and businesses hesitant to spend. So far, hot housing markets like Toronto’s have shrugged this off, but there’s higher risk than normal now of that reversing.”

The immediate threats: the end of mortgage deferrals leading to a surge in listings. A 65% plop in immigration, sapping demand. The collapse in Airbnb combined with jobless renters causing the condo market to swamp. Double-digit unemployment stretching well into 2021. CERB ending and government support winding down since Ottawa’s out of cash. The virus. Still here. Maybe that next wave or lockdown.

Wow. Serious stuff. Why would people take on this level of risk or, as Owen Bigland suggests, leverage themselves up the wazoo to speculate?

As with most decisions, there are good reasons and stupid excuses.

Here are the rational, logical, practical factors behind the current housing melt-up:

• Money’s cheap. More than that, it’s almost free. So why not borrow as much as possible to buy what I previously could not afford? I’ll never pay it off anyway, because I’m actually just renting a pile of dough. Life is short, brutish and they make you use Zoom. How is this a bad thing?
• Where else am I going to invest? It’s all too scary. Besides I get to live there
•  It worked for my parents.

But even more powerful are the emotional divers which have created a real estate boom in the midst of economic detritus. And, of all the emotions, fear rules.

• The world is terrifying. I need to cocoon. The newscasts are full of sickness, infections, deaths, protests and people who are angry, succumbing or talking through masks. My family and I need to bubble. In our house.
• The virus is terrifying. I want a safe environment. Why would I ride an elevator, walk a condo corridor, take the subway or even walk into the office again? My house is my world now, and it should be perfect.
• The city is terrifying. I want space and safety. A front door on the street. Fresh air through the windows. A back yard and a front walkway. Distance from others. Maybe the burbs aren’t so bad.
• FOMO. Sheesh, have you seen prices lately? If I don’t buy now I fear I’ll never be able to. Where do I sign, bro?

And up she goes. Of course when you buy something at an inflated price with money you have, risk is contained. When you borrow, it isn’t. For some, this may not end well.

Garth Turner August 25th, 2020

Posted In: The Greater Fool

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