• 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?


    The bull trap

    Do you agree with the following?

    • Virus spending’s off the charts. Governments can’t just borrow the money from the Bank of Canada, which creates it out of faerie dust and unicorn flatulence (as the Mills believe). So taxes are going up. A lot.
    • Interest rates have collapsed (look at bond yields – incredible). Mortgages are dropping. This is the sign of an unhealthy economy.
    • Recovery will come. The sun will shine again. Companies will make money and hire people back. But it will take ages. Air Canada (earnings off 90%) says three years to restore its business. Ouch.
    • We’re in the process of creative destruction. Much will change. People will piddle away less money on vacations and bamboo flooring. Consumer spending will fall. Employers will get lean. More will work remotely. Many unemployed will not be employed again.
    • The fact 720,000 families couldn’t make mortgage payments and asked for six months of forbearance is significant. Borrowed time. It ends in September.
    • Cities are stressed. Condos are unappealing now. Public transit is a costly sinkhole. Vast sporting arenas and convention centres will be empty for a long time. Real estate revenues down, costs up. Property taxes and utility costs will have to rise. Defined-benefit pensions will have to be reviewed.
    • Unemployment was a bit over 5% in February, then 7.8% in March. On Friday we will hear it was 18% or more in April. About five million just lost their jobs in a month. And it will take maybe five years before all those positions are restored. Look at this:

    Click to enlarge: it’s ugly.

    If you think the above is realistic, you know we’re closer than ever to a real estate reset in Canada. Yes, markets will bubble higher this summer as restrictions are eased and pent-up demand unleashed. Realtors will crow and mince around cockily. But it’s impossible to have a vibrant property scene when (a) the jobless rate is in double-digits, (b) income stress is everywhere, (c) taxes are increasing, (d) mortgage deferrals are ending and (e) governments fear a second Covid wave, keep social distancing in place and continue to terrify people.

    The summer housing rally will be a bull trap.

    This week we’re getting the latest stats out of Canada’s two bellwether markets. We know sales of condos in Toronto just declined 81% and detached deals were off 69%, while prices crashed 12% in a single month. And in Vancouver realtors report a 56% reduction in overall deals last month while the days-on-market number explodes more than 85%.

    But will prices follow the sales numbers down?

    Vancouver analyst Dane Eitel is warning his clients that a drop of $100,000 in average detached prices last month is just the start. Do not buy, he warns.

    Don’t try to catch this falling knife. Prices are down over $230,000 from the peak which is good. It will become even more attractive with time. As prices decline to 1.40 Million that will exemplify a discount of $430,000 to the market from the peak.?There is no rush to enter this market, we suggest patience.

    As social distancing is eased, inventories will rise. As mortgage deferrals end, more cash-stressed households will list. “With few options remaining, selling real estate will become an unfortunate necessity. Which will inevitably lead to foreclosures coming to the market as well. None of which puts pressure on the buyers,” he says. “If selling, take the hit early before the knockout punch is landed.”

    *???? *???? *

    Ben works in SF for one of those fancy new-age, digital, collaborative tech outfits. “For the first time, I feel compelled to write in and challenge something you wrote,” he says. And he quotes me as stating: “The jobless crisis didn’t happen because the economy choked on its own (as in 2008) but because politicians choked it off. The public health emergency has been unique in our lifetimes and deliberately gutting the GDP to stop it was an exercise never before tried in modern times, or on a global scale.”

    Here is his letter. Bears passing on to you…

    So, I’m here in San Francisco, the first North American municipality to go shelter-in-place. I can tell you that before government action, the area’s biggest employers had already made steps to protect their employees: letting them work from home, in many cases mandatory. My employer did the same: a week before shelter-in-place was instituted, everyone was forced home. At the time there were only like 50 confirmed cases in the?region.

    During this period the city was quickly becoming a ghost town. Less people on the street, less people on public transit; the city’s white collar workforce staying at home. Coffee shops, restaurants, caterers, etc. were already feeling the pinch.

    Even now with governments starting to ease up, the big employers are not going to race back to the way it was. Salesforce, Facebook, Google – they’re going to keep their 100,000s of employees at home, and local business will struggle to resume. Government has nothing to do with it.

    This virus was going to impact us one way or another economically. I agree that government action exacerbated the situation, but your comments read like they’re the singular cause, and it hurts the rest of your writing that I’ve really come to enjoy over the years. Hope these anecdotes have some measure of influence on what you write next.

    Good points. Indeed these corporations were leaders in social distancing and remote working. But governments have been directly responsible for ordering many businesses shut. Hairdressers, retailers, landscapers, dentists, cleaners, chiropractors, chefs, pilots, waiters and fabricators don’t have the luxury of working from a keyboard at home, keeping their incomes. In large part unemployment – and the massive cost of supporting those workers – has been the direct result of political decisions. And now governments find it’s a lot harder to turn stuff back on than it was choking it off. Most tragically, it’s the low-wage earners – not the six-figure Google kids – getting whacked by this.

    We all see through our own lens, Ben. Sometimes clearly. Often not.