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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

October 23, 2020 | Le Pain

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.

Crazy times? You bet. Remember them.

This week Le Chateau went bust. Over 120 stores will close and 1,400 more people lose their jobs. Also in the last few days the airlines are making a final desperate case for federal aid before the hammer falls. Westjet bailed out of Atlantic Canada and is trying to deal with a flood of refund requests. Europe just closed the door to travel from Canada. The US border will stay shut for a long time yet. Air Canada has chopped routes. More coming in a few days. We could end up with one carrier and prohibitive pricing.

In the country’s largest city tenants have fled, condos crashed, landlords are throwing incentives at renters and apartment prices are falling daily. And yet September saw the biggest price increase for houses in 22 years.

By the way, Toronto has an unemployment rate of 12.8%, with about half a million people jobless. That beats Calgary (12.6%) and is way above the national average of 9%. In Vancouver there are 11% of citizens without a job. These are grim numbers. We’re in the grip of a recession, clearly. But the media keeps telling us everybody is happy working from home, as bidding wars escalate real estate values. It’s like this virus is giving us a big, national pajama day that lasts for eight months.

Here’s some reality.

Covid, says a new bank poll, is killing personal finances and the confidence of many. Four in 10 think this has whacked their retirement plans. A quarter of us can’t make RRSP contributions – no money to do so. A third of people now think they’ll have to work more years to make up for this virus and 40% who thought about downsizing real estate to raise retirement cash are unsure. Why? Because they see rising prices and fear they’ll just end up paying more.

Meanwhile yet another survey (also sponsored by a bank, the green one) says TV-watching is up 63% and people are cooking at home 54% more of the time, instead of spending money on traveling or entertainment (or working). So this is why airlines have laid off or terminated thousands of employees, why hotel occupancy has gone from 78% (seasonal norm) to 30% and six in ten restaurants are headed for the grease bin.

Now we have this damn second wave. Big hits in Quebec and Ontario. Even BC, NB and the flatlanders are surprised at how the bug has crawled back. In the US – just 11 days before the vote – new infections top 70,000 and are inching up to record levels. Just imagine how much fun January will be.

The pandemic is doing what this blog predicted when it first hit. People with wealth, assets, balanced portfolios and no debt, are getting wealthier. Financial markets have been supping at the trough of government and CB stimulus – with more coming. But people who really need their jobs, don’t have enough saved or are slaves to fat mortgages are way more at risk than they were in February. The only saving grace for them has been a bump in housing values. But that’s not going to last.

Here’s yet another bank survey (the blue guys) which underscores the goofiness of society. It found 56% of first-time buyers intend on hitting up their families for the down payment. The average ask among Millennials is (seriously) $100,000.

Of course money shoveled off to junior so she can buy real estate means a smaller nestegg left in the Bank of Mom to finance retirement. Mix in a protracted recession, an enduring pandemic, structural unemployment and the post-Covid certainty of higher middle-class taxes, and you can see where this thing is going.

The conditions which created today’s housing prices cannot be sustained. Runaway public debt will increase bond yields and mortgage costs in the years ahead. The current collapse of entire industries (bricks-&-mortar real estate, vacations, business events, live entertainment, pro sports, hospitality, food service) will require a decade of rebuilding. On Friday StatsCan reported that the travel crash alone will cost 400,000 to 500,000 jobs this year. Long-lived unemployment and the disruption the bug’s had on personal saving mean less disposable income.

So is buying a house in a pandemic and during a recession with 10x or 20x leverage when prices and emotions have never been higher a rational act? Duh.

Covid is bad. FOMO is worse. Everybody chill. There’s a long road ahead.

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October 23rd, 2020

Posted In: The Greater Fool

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