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    The crisis thing

    Chinese authorities welding shut the door of an apartment building containing infected people. Screaming citizens being dragged against their will into ambulances. A woman without a face mask being killed by police as they drag her from a car. Stories of five million residents of the most affected city escaping the quarantine, spreading coronavirus everywhere.

    This is the stuff on Twitter feeds, in my email box and buried in a slew of comments made to this blog. The pandemic is apparently a great new way to dis Chinese and trash the totalitarian state. How much is fabricated is unknown. How much is true, also a mystery. Is coronavirus peaking, to be just a memory by July? Or is this 1918 again?

    No idea. But let’s look at the financial fallout.

    First, Mr. Market has decided this is a thing, not a crisis. Despite a few days of doubt, North American equities have barely budged off their record highs. That’s despite the fact Chinese production of everything from car parts to iPhone guts and pharma ingredients is basically kaput. There’s confidence this will all reignite, and soon.

    Commodities aren’t so sure. And bonds are doubtful. Oil dipped below fifty bucks on Monday despite big efforts by producers. And money continues to pour into government debt, with bond prices higher and yields lower than they used to be. So somebody’s blowing smoke.

    Scotiabank economists threw out a new virus report Monday. The historic quarantine measures taking place in China, “will likely fuel a sharper slowdown in China in the near-term with effects already spreading beyond travel and retail to production and export activities,” it said. This comes despite a boatload of liquidity that Chinese authorities are throwing into the market, as they try to keep Asian investors from freaking out.

    Not much doubt the Chinese economy will crater in the short run. GDP growth, expected to be 6% in this quarter will likely hit 4.6%, says the bank, then rebound. For the year as a whole anticipate growth of 5.4% – which is a disaster for Beijing. The regime needs about 7% to keep all the wheels turning.

    In the US now there’s noise this virus might tank real estate. Unlike here, Americans want, court and enjoy big Chinese investment in property. Buyers from China took title to $13.4 billion worth of American homes in the last year, which was less than half the amount invested in 2018 – thanks to the Trumpian trade wars. Now, just as that battle is winding down, the virus has frozen travel and investment. Washington has banned all foreigners who have been to (or live in) China from entering the States.

    “You have less incentive to buy real estate if it’s unclear if and when you’ll get to visit the property,” says realtor economist Danielle Hale. “In the short term, the virus could dampen sales further.”

    Meanwhile the Scotia guys say coronavirus will shave a little – not a lot – off our GDP. Unless, of course, it gets worse. Or if my Twitter feed isn’t just delusional, manufactured, scare-mongering, alarmist, prepper, race-baiting poop. Let’s see in July.

    ????? ????

    On a somewhat related note, a trip now to Vancouver where locals know houses would be affordable and unicorns roam freely in Stanley Park, were it not for the Chinese. The belief ‘satellite families’ and baggy offshore investors were holding thousands of properties empty for speculative purposes was a genesis of that city’s historic empty houses tax.

    So for the past couple of years people who own real estate but do not live in it full-time or have long-term tenants, are required to pay an extra tax. It hoovers about $38 million a year and is intended (the lefties running the place insist) to force vacant properties onto the market, dropping the vacancy rate (and maybe rents as well).

    Time for an update. The tax was just increased by 20% and homeowners had until a few days ago to declare whether or not their properties are occupied. What’s the status?

    Originally housing warriors claimed 25,000 housing units in YVR were sitting empty, and demanded politicians act. Then in 2016, a report commissioned by the city and based on questionable evidence concluded 10,800 homes – most of them condos – were idle. That July the province gave the city the power to tax those property owners, and the new levy came into effect.

    “Ultimately, the goal is to get thousands of units back into?rental housing at a time when it’s almost impossible to find?a?rental home,” proclaimed the mayor.

    So how many places are void?

    In 2017, 1,131 were vacant. This year the number is 787.

    There are 310,000 dwelling units in Vancouver, and 600,000 condos in Metro YVR. Do the math. Do 787 under-used properties pose a social threat?

    The vacancy rate at the time the tax was imposed was 1%. Today it’s 1.1%. Fail. Rents have gone up, not down. And now YVR has just another tax, on top of the speculation tax, the foreign buyer’s tax and the big-house school tax. Taxes, of course, don’t make things cheaper so in Vancouver there’s just as serious an affordability problem as existed four years ago.

    But there is more government.

    The condovirus

    Condos are the entry door to home ownership for thousands. Hundreds of thousands. Most think they’re investing in real estate, but no dirt’s involved. No property. Owners own from the paint in. The rest of the building is their shared liability. That’s what condo or strata fees are for – to help pay for the cost of maintaining a structure worth millions. Plus insuring it.

    If more condo buyers knew what they are buying into, many would freak. They’d bolt. And so they should. A liability disaster may be unfolding.

    At first the crisis seemed remote and unique. Condo owners in Fort Mac facing disaster when premiums soared in a community that was attacked by wild fire. Property values plunging to near zero. Owners under water. Mortgages being cancelled.

    Then it spread.

    Premiums for condo corps in some Alberta centres spiked by 700% or more. Monthly fees escalated wildly as a result. Then last month every condo owner in the province became personally liable for up to $50,000 in potential payments. Condominium corps can seek recovery of the deductible portion of an insurance claim to that level from any condo owner for damage originating in their unit – whether they caused it or not. (Many condo associations in Canada have deductibles ranging up to hundreds of thousands, and owners whose units cause damage can be on the hook for the full amount.)

    As one lawyer interprets it: “That means that if something happens in the unit and it’s not your fault — the toilet explodes, there’s water loss, water damage goes through to the floors below — and there’s a $50,000 deductible or a $25,000 deductible, the owners are now responsible for the deductible.”

    But it gets worse. What if your condo building couldn’t get insurance at all? Then you couldn’t sell your unit. No buyer could get financing. Property values would collapse. Your own financing likely would not be renewed.

    Which, as it turns, out, is exactly what’s happening in BC.

    Catastrophic loss events like the 2016 Fort Mac fire, the blazes in central and northern BC or the 2013 Calgary flooding combined with climate change projections, changing weather patterns, escalating building and replacement costs and inflated real estate values (thanks to demographic demand and the mortgage stress test) have seriously goosed condo values, and lie at the heart of a liability crisis. Insurers are backing off. Risk has exploded. Most have no idea what may be coming.

    In Burnaby, for example, one condo corp has seen the insurance premium escalate from $200,000 a year to over $800,000, resulting in a massive hike in monthly fees. Other developments have been unable to renew their policies at any price, cancelling sales of individual units since buyers can’t get a mortgage in an uninsured structure.

    Says Tony Gioventu, executive director of the Condominium and Homeowners Association of B.C., “This will collapse our real estate industry because no one will be able to get mortgages and there will be no buyers and no sellers.” The buildings hardest hit are those where the most expensive units are located, plus any that have had recent insurance claims or where condo boards have neglected to keep up with big maintenance projects, fearing the impact of special assessments on condo owners.

    In BC, the provincial government is being pressed to step in and legislate some kind of solution. Nationally the Insurance Bureau of Canada has engaged a risk manager to work with condo boards in finding ways of reducing their exposure. Nowhere in Canada is there any governmental cap on condo premiums, nor are insurers required to get approval for increases.

    In Ontario the insurance issue is being called “a crisis’ by the Canadian Condominium Institute as a growing number of boards cannot find insurance, at any cost. The burden which could be imposed on individual condo owners is large as insurers reprice risk in a changed world. Already many of them, as first-time buyers, struggle with financing payments, property taxes, utilities and personal condo insurance as well as monthly corporation fees. The last thing they need is hundreds more a month in charges – or the potential of a huge deductible – as policies jump in cost.

    What to do?

    In Alberta every condo owner needs enough personal insurance to handle the cost of the potential $50,000 deductible now on their shoulders. Everywhere people with units must prepare for the certainty of rising monthly condo or strata fees, and perhaps a special annual assessment, as boards are hit with premiums they must pass on. It goes without saying as the cost of condo ownership escalates, property values will be impacted. Mortgage lenders know, and are already adjusting their own risk management.

    Mostly, if you’re thinking about a condo purchase, think again. Be prepared to accept greater liability and have the capacity to absorb higher fees. Never, ever buy without requesting a status report from the condo board and having your lawyer parse it. That will show the state of insurance and should highlight developing issues. If you already own, ask the condo board for a copy of the current certificate of insurance – it will outline deductible costs. Insure against them.

    Sorry, kids. Mom might have been wrong. You should have rented.

    Below: Brian sends this photo along, with the caption, “This is what happens when a condo runs out of money – in Hollywood, Florida.”


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