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  • Eating risk

    Over 700,000 homeowners have pleaded for mortgage relief. What does this tell us?

    First (duh) these folks can’t pay, don’t want to or need the cash to finance food, Netflix and N95s. In short, they own real estate they could only afford when a regular income was flowing. No savings, no reserves, lots of stress and debt.

    It’s what you’d expect when the jobless rate explodes from 5% to 20% in a month, and after ten years of unbuckled house lust. Having all your net worth in one asset at one address on one street in one town doesn’t look so genius anymore.

    Beyond the personal grief, there are systemic wobbles.

    The federal agency standing behind all this mortgage debt – CMHC – has been saying and publishing some worrying things. Since the agency is funded by tax dollars, we should pay attention. (If there are any of them left.) For example, on Tuesday this was buried in the corp’s annual report:

    “Increases in insurance claims losses may occur, however we are currently unable to estimate the potential impact on our financial results or condition. In the event our capital position may be impacted, under the Capital and Dividend Policy Framework for Financial Crown Corporations, the Government would stand prepared to inject capital into CMHC should additional capital be needed to deliver on our public policy mandate.”

    Whoa. Did the guys insuring $600 billion in residential mortgages just say they might need a federal bail-out? After just buying $150 billion in mortgages from the banks amid the pandemic emergency?

    Sure looks like it. Exploding unemployment, the certainty that reduced incomes will last for months (or years), historic levels of household debt, a collapsed real estate market and 10-15% of all owners who can’t pay their monthlies has the siren going off in Ottawa. Clearly CMHC is telling the government? defaults and loan losses may dot the horizon.

    Already the agency has suspended its regular dividend payment to the federal government in order to preserve cash, and issued this statement: “As a key stabilizing component of the Canadian financial system, we will be substantially increasing our appetite for risk as we and other institutions absorb the impact of these events.”

    Hmm. More risk. Sounds a tad ominous. Now add in what CMHC boss Evan Siddall and his colleagues said yesterday – that real estate markets will not bounce back this summer. Or autumn. Or next Spring. Instead: “The best case we’re looking at … house prices getting back to their pre-recession levels, at the earliest, by the end of 2022.”

    That’s two-and-a-half years from now – the “best case” scenario, which presumably means Covid is defeated, we have a vaxxed herd, have managed to turn the economy back on, restored? personal incomes, reflated consumer confidence and revived the housing market. As you can see, lots of assumptions there.

    But, as mortgage broker and blogger Rob McLister suggests, what if this doesn’t happen?

    What if people stop believing in pent-up housing demand? When market psychology sours, more buyers step aside until the coast is clear. And the coast isn’t clear if people fear an avalanche of supply (property listings) post-lock-down. “Demand will be reduced by a weak labour market and weaker investment activity,” writes CIBC. “Forced sales will add to supply, and probably outweigh the offsetting impact of reduced supply of new units.”

    Could these economic conditions (including troubles at CMHC) stop lenders from lending, preventing buyers from buying, causing prices to cascade lower as sellers grow more desperate? Some people think that’s already started to happen in the commercial real estate space.

    Banks are freezing financing for smaller rental properties, thanks to virus-inspired worries over owners’ ability to carry the debt if tenants vanish, lose income or go broke. As one source put it: “If you’re a landlord, and looking to refinance, you can’t get that. So you’re probably going to have to sell. But they’re also limiting new owners who might want to buy that space.” As Reuters reported this week, this is driving some borrowers into the arms of the sub-prime lenders and their sky-high desperado lending rates.

    Well, there ya go.

    It’s a safe bet mortgage deferrals plus the CERB will be extended now, kicking the crisis down the road for a while longer. Key players – the banks, the feds, the housing agency – all pray enough jobs, income and confidence return to keep this baby from blowing. But it’s lookin’ shonky.

    Stay away.

    This week BeeMo shocked many when the bank said it expected up to 80% of staff to stay home, post-virus. No cubicle farm. No collaborative work spaces. No elevators to floors in the sky. No gleaming bank tower. Another nail in the downtown coffin.

    Daniel’s one of those financial worker bees. An IT banker dude who knows he’s not going back. “Like many others I’ve been forced to work from home for the last two months. Now thinking about the days where I would spend my lunch discussing your blog and the market with my coworkers seems nostalgic.”

    By the way, the Bank of Montreal has 45,500 employees. Cutting thirty-six thousand of them loose – many in Toronto – seems like a big deal. What could this mean? Danny continues…

    Since I will not be going back to my downtown office after this is over I have decided to ditch the concrete shoe box I live in. I gave my landlord two months notice and will be moving back into my?parent’s house in the burbs for the time being. Instead of paying a substantial amount each month to be close to an office I will rarely set foot in I’ll be investing a lot more.

    This is where it gets interesting, my unit has been on the market for three weeks and there have only been two viewings. My overly confident landlord thought he could get more than he was already charging me. He is now growing desperate at the thought of the unit sitting empty for a while. A realtor friend of mine says around the same time last year there would have been multiple offers within a week. The inventory hasn’t been this big in the last five years and it grows each day. Thanks to real estate data now being available to the public, we can see listings being pulled off and relisted because they were there for too long. As you already know this is merely the tip of the iceberg and the real blood bath will be this fall when mortgage exemptions are up.

    Hmm. Remember what a certain pathetic blog has been telling you?

    The downtown condo market is living on borrowed time. An anachronism. Amateur landlords are in serious trouble. The Airbnb collapse just makes it worse. Rents and prices down. Post-Covid migration will bite urban values. The mortgage forbearance crisis is coming this autumn. And the bounce summer may bring could well be a bull trap.

    Unemployment of 18% in April will not be 5% in July. Or December. Or next March. Or maybe this decade. The economy is being pulled into disinflation as the structure we had a few months ago is unwound. Low interest rates are bad news. Demand will trickle back. Not gush. Governments that spent big to support people will have a right to take back much when the crisis ends. Taxes. Many businesses are not re-opening. Movie theatres, arenas, convention halls, hotel ballrooms, underground food courts and most restaurants will be empty, or close to it, for months. Or years. Mass transit – the subways of Toronto and Montreal, the SkyTrain, GO Transit system, the CTrain – will lose ridership, become uneconomic and curtail service.

    What does this mean?

    One consequence is the devaluing of real estate close to city cores – since those cores will have fewer white-collar jobs, workers or appeal. Why would people continue to spend $2 million for a flimsy house on a 30-foot lot in the 416 mid-town hood of Leaside, for example, when a 15-minute car ride to downtown is no longer the big draw? Move 30 minutes north and save a million.

    You might have seen the April real estate board numbers by now. Sales crashed everywhere. Down 63% in Van, 67% in Toronto, 63% in Calgary, 59% in Victoria. All these boards sought to blunt current price trends in their media releases with year/year comparisons. In Toronto, for example, prices have actually dropped to year-ago levels, wiping out twelve months of gains with an April decline of 11.8%. Inventories have crashed lower as sellers recoil. The sales-to-listing ratio has plunged. There’s just no positive glimmer in these stats, even as five-year mortgage rates spiral towards the 2% mark.

    These are the lowest sales volumes in the lifetime of virtually every agent and broker. No showings, no sales and virtually no market mean families have their net worth trapped inside assets which the virus has turned illiquid. If this continues, it’s a nightmare scenario for households with income stress, no reserves or liquid wealth, uncertain employment and mortgage payments set to resume in September – after the government pogey has run out. If they need to exit, will they be able?

    Combine that with the potential deurbanization that the Bank of Montreal’s promulgating and you can ask: whither housing?

    One scenario: a torrent of listings by late summer as financial stress mounts. Forced sales. Foreclosures. Mortgage defaults. Job loss. Wary buyers. Fewer immigrants. Risk-averse lenders. “By 2021, as the economics of housing returns to fundamentals, we expect an array of factors to result in a weaker market with some downward pressure on prices,” say the economists at CIBC – another bank about to tell people to stay home.

    Meanwhile, consider Dan. No more office downtown. No more condo. Moved home to the burbs. City landlord in distress. Will probably list. Too late.

    Does any of this sound temporary to you?