Welcome back everyone. This has been a tragic week. Today we talk about educating ourselves on racial inequality, the bump in stocks despite the chaos in the world, the future of retail and restaurants in a socially distanced society, and we answer your question: what are your thoughts on the property market?
WEEKLY PULSE
Riots have broken out all over the US in response to racial inequality, police brutality focused on the African-American community, and the killing of George Floyd in Minneapolis. George Floyd saying I can’t breathe was a tragic echo of the last words by Eric Garner, an African American choked to death by a New York City police officer in 2014. This is not a ‘new movement’. This is a constant reality for so many and it is our responsibility to educate ourselves. I highly recommend you listen to the New York Times Daily Podcast, dated May 29/2020: Special Episode: The Latest from Minneapolis. I also advise the Vox Explained episode on Racial Inequality: “The Racial Wealth Gap”. It gives tremendous insight and perspective regarding the primary source of the wealth gap: property. Also the book “Me and White Supremacy” by Layla F Saad is one I recently added to my list. Looking at Canada, and its most multi-cultural city, Toronto, many of us who do not experience daily inequality feel we are sheltered - but we are not. Take a look at an article published in 2018 that suggests the possibility of riots due to racial inequality in Toronto… (https://www.thestar.com/news/gta/2018/09/30/toronto-is-segregated-by-race-and-income-and-the-numbers-are-ugly.html).
President XI Jinping of China and President Trump of America are pushing dangerously closer to what some are calling the start of the next Cold War. Further escalations will have a massive implication on global markets. One of the primary sources of global growth, which has led to large profits, stock market gains and real estate appreciation, has been globalization. Globalization relies primarily on the ability of the world leaders to work together. The time of the Cold War was when world leaders did not. We must follow this closely (https://www.businessinsider.com/the-us-china-entering-new-cold-war-amid-coronavirus-2020-5 )…
The Chicago Federal Reserve released a study saying that moderate social distancing and the limiting of gatherings to a maximum of 50 people (we are still at a max of 5) will create financial distress after 3 months to: 88% of restaurants, 65% of retailers and 38% of manufacturers. What does this mean? It means that without concerts, conferences, clubs, parties and travel (still don’t really understand how you can get on a plane of 300 people in light of a 50 person max) that so many of the places we love will not be able to survive. If you are in or related to these businesses, conserve your money, let your bills add up - survive at all costs. If it is between paying rent to a landlord who won’t budge and your future survival, choose the latter…
Despite the chaos in the US and around the globe, The S&P 500 Index was up 1.3% last week. It is down 6.5% from the start of the year, and about 10% from it’s all time high in February of 2020. It is interesting to look for parallels through history to try and act as a guide for us going forward. The early 1970s had many similar events to today: political scandal (Nixon), an oil crisis and it was the last time that over 1/3 of those between 25-55 were unemployed (as reported by The Economist). During the 70s, the S&P Index dropped nearly 50% until in the 1980s, at the peak of the cold war, military spending and innovations such as the internet led to one of the greatest 20-year periods in history. Here is a chart of the S&P over the last 90 years (https://www.macrotrends.net/2324/sp-500-historical-chart-data) Things are uncertain right now as are the historical parallels we are using for a guide. Have a long term time horizon. Invest in tranches…
The property market in Canada
Thanks very much for asking this question. I have been amazed at the number of people I have spoken to who have been saving for years and are ready and waiting to buy their first house. Nicely done! While I am not an expert in the real estate market, I share the general sentiment that this is a great opportunity to buy – but not for the reasons you might think. Here are my three top reasons that right now is a good time to buy a home:
Housing price drops due to a loss of immigration and the fear of a coming housing price drop;
Record low interest rates are likely to stay low for the foreseeable future making it easier for us to buy;
A big price jump in housing over the next 10 years (if you thought housing was expensive before…).
This week, we are going to dive into #1, the opportunity presented by Covid-19 to buy a home. Next week we will dive into our purchase ability due to low interest rates and how that will lead to the upcoming housing boom (so if you already own home, fret not it’s still going to go up).
Expectations for Housing Prices
The Canadian Mortgage and Housing Corporation (CMHC) has recently released a report saying that real estate in Canada will drop 9-18% over the coming year. Scotiabank released a report saying prices will drop only 5%. National Bank says 10%. My two favorite economists from RBC and Manulife are split with one saying not much will change and the other saying there is a big drop coming in line with the CMHC report. Prices in housing are tough to predict.
Despite the variability in projections, one thing that is agreed upon is that the drops will not be across the board. Housing relies on the most fundamental of economic concepts: Supply and Demand. If there is more demand than supply, pricing goes up. If more supply than demand, pricing goes down. COVID-19 has hit demand. The loss of jobs and future uncertainty in the security of our jobs has and likely will continue to reduce some demand for housing. More importantly, the loss of immigration will cause a greater impact on the demand for housing. But does that mean that every neighborhood will see an equal decline? No. It does not.
Real estate pricing is strange. In 2001, after the tech crash, when thousands of computer engineers were out of work, the price of an average home in San Jose, the center of technology development, actually went up! In 2008, the financial crisis led to the loss of jobs for thousands of financial professionals. At the heart of finance in New York City, the average condo price, as seen below, went down and stayed down for quite some time.
At the same time, during both crashes, Toronto housing didn’t really change.
The largest recent blip in Toronto housing was not during the tech crash of 2001 or the financial crash of 2008. It was actually in 2018 when there were new taxes introduced to reduce the impact of foreign investment (the blip is even bigger in Vancouver). When foreign buying slowed, so did our housing market.
This is not an equally felt recession – just as the tech crash in 2001 and the financial crash of 2008 were not equal recessions. The center of this crash is in services (this is in fact the very first services recession). But, unlike the previous recessions, this recession comes with government stimulus for each of us that have been affected and an accompanying bank forgiveness of mortgage payments. Because of this I’m not sure there will be a similar dramatic impact like we saw in Manhattan in 2008. Will government stimulus be enough to support those who have lost their jobs and prevent a large amount of selling? No one can tell.
What we can tell, and something each economist out there agrees upon, is that COVID-19 will stop immigration. Toronto pricing has increased along with its population. This city has gone from a population of 2 million in the 70s to over 6 million today - and that isn’t just because the 70’s was full of baby making. Immigration has been one of the primary sources of growth for the real estate market. Will the loss of immigration shock demand in every area? Economist suggest it will not. It is expected that condos and suburbs will be impacted, but that houses might not.
This does not leave all those looking for deals for homes and in other areas without hope. Let’s assume for a second that I am wrong and housing does decrease across the board (like many of us are hoping). I have seen realtors post on Facebook about the upcoming wave of supply coming to the Toronto market this fall and that buyers should be ready to go. Yet at the same time, I have spoken to many people who are ready and looking to buy. If everyone is waiting for the same event in the fall is it more likely to happen or not? As we said in the intro, the answer is maybe - but it is for sure not going to last long. Home buying in the US is actually already up in many areas from pre-COVID levels! Are you willing to risk your home purchase on the chance that you can expose a small window?
If you have ever played fantasy sports and participated in an auction draft, you know very well that once the good players are all gone, the mediocre ones go for far more than they are worth due to an excess of need and a limited supply. In my opinion, housing will be no different. Be wary of saving for that perfect house because there could be an excess of buyers and not much left – which will push the prices of houses in desirable areas right back to where they were before. House sales in Toronto were down 57% in April. Inventory is low and there many buyers waiting on the sidelines - perhaps now you have a better chance of getting the house you want due to lower competition.
One of the best investment pieces I have read so far suggests that during this crisis some things will be cheap and some things are not. There is no certainty on how things will play out. In that sense, if you find something priced right, make an offer you feel comfortable with. If sellers are anticipating a drop in the market, maybe they list for less now or they are forced to take the first offer they get. Maybe they are looking to retire and are listing now to sell ahead of the anticipated drop. If you have been waiting to buy, get pre-approved for your mortgage, make sure you can be aggressive, and go test the market. Offer under asking, offer at asking if you think there is value, you never know what fear and uncertainty can do. As we will explore next week, the housing market is going to explode and no matter what price you buy at, you will be happy you did.