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December 3, 2020 | Post-vax

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.

All real estate is local. Never forget that. Maybe Courtney did.

“I’ve been reading your blog since the beginning,” she says, vainly hoping for clemency. “Now I need to know about buying a condo in Calgary.

I relocated here from Toronto 4 years ago.  I am 65 and retired early due to an illness so have been living off savings and now I have CPP and OAS.  I have over $1m invested and am renting a nice apartment downtown.

There is a glut of condos on the market here at crazy low prices.  Should I use some cash and buy a place, if I can get mortgage approval?  I’m sure that when times are better my rent will continue to increase.

Of course not. Calgary’s condo market is a disaster. The last time investors there made money on an apartment people were listening to The Pussycat Dolls and Stephen Harper was in charge. Or the other way round. A mess since – for the usual reasons. Too much supply and not enough demand.

Now AB is virus central with field hospitals on the way and a new US administration that hates oil. Outside of Newfoundland, Alberta has the highest unemployment rate in the country. In the last year condo sales dropped and prices flatlined.

In short, why would Courtney take half her million-dollar retirement nestegg, hopefully making 6% or so, and drop it into a condo which is appreciating by zero and may fade over the next few years? The costs of owning would be extreme – between $3,500 and $4,000 a month when taxes, monthly fees and the lost investing potential of her equity are added. Meanwhile the average listed rent for a 2-bedder in Cowtown is now just $1,350, a 6% drop from last year. And the vacancy rate – at about four per cent – is relatively huge, compared with places like Toronto or Vancouver.

In short, five hundred grand left invested could pay for Courtney’s digs more than twice over. Worse, she’d be immobilized, trapped in a quasi-illiquid investment should she need to move. So the bottom line is clear: condo renters in Calgary win. Owners lose.

Now, how about a place like Toronto?

Last month the Covid property storm started to abate. Sales were up year/year by a lot (24%) but they fell sharply (17%) from the month before. In fact, prices faded, too, with the average dipping by $13,000 to $955.600. The real story was a continued surge in demand for properties with dirt and a further shunning of condos. Overall the price of apartments is 3% lower than a year ago while detached homes have risen 15% across the GTA and 19% in soulless 905.

Not only are condos cheaper, they’re earning less. One-bedders in a good 416 location that were pulling in $2,500 a month a year ago are now being leased for $1,900 or less. That’s a 20% hit for owners, and comes atop the collapse in Airbnb, the shuttering of universities and the lockdown of restaurants and retail outlets where a lot of renters toil. Worse, the desperate mayor (who used to be a Conservative) is now promoting a Van-style vacancy tax which will further depress the apartment market. Meanwhile more than twenty thousand new units will come on stream in the next year, pushing unsold inventory higher even while the number of available resales pops. In the last twelve months, condo listings have already doubled.

But all real estate’s local, remember?

The GTA is Canada’s biggest market, by far. The virus has had a profound impact there. Price appreciation has been double in the ‘burbs compared to the city. Sales of detached properties in 905 have soared almost 34% versus 19% in 416. A new survey of Millennials shows they’re 300% more likely to buy a house in the next year than the rest of us. And what do they want, according to Properly?

Not surprisingly, millennials are dreaming of a detached home (45%), with a backyard (57%), more square footage (44%), closer proximity to green space (34%), and a better home office (28%).

Add in a puppy and a pony, and you understand these kids perfectly. The trouble is, however, affordability. The average price of a place in the suburbs is now $1.24 million – not far off from the $1.4 million city average. To swing this, even with cheapo mortgage rates, you need an income three times the average. And when the pandemic finally ends, opening the door for bond market yield hikes, home loans won’t be 1.6% any more.

In short, what you see now will not last. The vax will defeat the virus over the course of 2021-2. This weird thing called WFH will start to dissipate and then become the preserve of IT cowboys, freelance psychotherapists and TikTok stars. The downtown will fill again. Clubs, bars, arenas, theatres, galleries, convention centres and restaurants will open. Bosses will want to overlord their serfs once more. In the future, as in the past, people will wish to congregate and live where the action is, instead of watching for faint indications of life on their Mississauga cul-de-sac.

Just as people with insight, confidence and perspective bought unloved, dumped, cheap equities when the virus hit, so will woke investors understand some real estate can perform the same. The students will come. The new immigrants will arrive. The renters will be working again. The tourists will show up. And the Mills needing to get on the property ladder will buy. All this, as Covid moves into the rearview.

What did that Gretzky guy say? Oh yeah, skate where the puck is going.

Did he ever play in Alberta?

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December 3rd, 2020

Posted In: The Greater Fool

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