Nesting

Ottawa. Victoria. Niagara. Kelowna. Montreal, Toronto and Vancouver. Mississauga, Burnaby, Etobicoke, Abby and PoCo. It’s the same story everywhere. House sales exploded in July and August. Prices have risen to meet demand, since inventory levels in most markets were at a Covid low.

Logically, this is nuts. Unemployment in Canada is north of 10%. In centres like the GTA, a lot worse. Millions remain on government pogey and hundreds of thousands have been unable to pay existing mortgages. Small shops, restaurants and factories have been whacked and many will never reopen. Tourism is dead. So are conventions, sports and travel. The country’s in the midst of the worst recession since the 1930s. Nine thousand people have died of a contagious virus for which we have no cure. Social distancing and masks have crucified retail and are destroying eateries. Downtown cores are dusty wastelands. Schools have been shut for six months. Airport passenger levels are down 90%.

And yet, a real estate feeding frenzy. Debt levels are surging. Bidding wars, blind auctions, bully offers and people grabbing houses they’ve only Zoomed or FaceTimed. It’s all happening. It’s real. It defies reason.

And it’s not just isolated, a unique Canadian affliction. Check out these headlines from my daily feed:

Why the Indiana housing market remains so hot during the pandemic
The Indianapolis Star

New Yorkers are Fleeing to the Suburbs. ‘The demand is insane’
The New York Times

Hot Property newsletter: Hot times in the real estate market
Los Angeles Times

Why residential real estate is becoming more attractive in the suburbs
Montgomery County Paper

Real estate market soars despite pandemic
Roanoke Times

Real estate sales reaching lofty heights
The Anna Maria Island Sun

Why residential real estate in South Bay is red hot despite the pandemic’
San Jose Spotlight

Act fast to land a home in today’s market
Orange County Register

Expert: Panic buying hits Denver housing market
Westword

Housing market continues to soar in southwest Michigan
ABC 57 News

Portland broker see rebound in housing market during pandemic
KGW.com

Millennials help power this year’s housing-market rebound
Wall Street Journal

Record sales, record prices in Colorado’s real estate market’
9news.com KUSA

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If we can understand why this is happening, perhaps we can determine if it’ll last. Knowing that could answer this question: are today’s virus buyers savvy or senseless?

The obvious first reason houses are going up is that interest rates have come down. Cheap mortgages allow folks to borrow more, spend more, and squeeze prices higher. Second, we had no spring market. It was lockdown time, so pent-up demand exploded like a sailor on shore leave. Third, demographics have been pushing real estate. The largest cohort in society are the Millennials, all 9.8 million of them. That’s 27% of the population, and they’re all horny. For houses.

But those are just the reasonable reasons. There are a slew of unreasonable ones, too. They have to go with a certain global pandemic. Maybe you heard.

Covid has infected millions of brains, inserting fear and a sense of victimization. In a scary, out-of-control world which is beyond the experience of anyone alive, people are seeking shelter, refuge, safety and all the predictability they can get. Nesting. Cocooning. Owning a home seems like gaining control over your own surroundings and destiny. In the fog of emotion it seems if you lost your job, or society continued to unravel, you’d be better off as an owner than a renter who could be turfed. Of course that ignores the far higher costs of owning than leasing, but this is no time for logic.

Then there’s the direct virus impact. Millions are working remotely, so the dwelling becomes their world, 24/7 & 365/yr. They want more space from kids and spouse. The office downtown is shut now and may be for a year. So they can move to the burbs or a small hinterland city and finance more house. Meanwhile fear of germs, strangers in the hallway, sticky elevator buttons and scary garbage rooms have fueled a flight from high-rise condos into low-rise semis, towns and detacheds.

Layer on this a thick coating of financial illiteracy. Most people have no liquid investments, have never invested, think the stock market is a casino and only know their parents made a fortune on a house they bought in 1978. So what if they need a $1 million mortgage now? Nobody actually expects it off since you’re renting money as you move up the property ladder with equity the market hands you. every year.

Lastly, all of the above has created FOMO. Fear of missing out. It’s a huge driver of the emotions which lead people to take irrational actions. Toronto agent Steven Fudge has written about this convincingly:

Fear evokes a visceral reaction, which focuses entirely on the moment (fight or flight). FOMO has incredible strength and ability to separate people from their logical assessment of a property. Things like budget, property inspection and even the concept of debt are pushed directly to the side as the homebuyer focuses on the task at hand and is willing to do what it takes to secure a purchase.

As a result, in the midst of a pandemic and the worst downtown in our lives, house prices have peaked and household debt is soaring when rates are at an historic low and can only increase. What could possibly go wrong?

Well, the mortgage deferrals are done. No more. Now we get to understand the consequences.

Earlier today the federal regulator dropped the hammer, telling banks any new deferrals they grant will be treated as non-performing loans, requiring them to raise more capital. In effect, it signals the end of a six-month period in which almost 800,000 families stopped paying their obligations.

The program will be phased out over the next 90 days with the bulk of deferrals ending next month. “Banks are now in a better position to employ their business-as-usual alternatives to support troubled borrowers,” the regulator said. In general that means moaning and weeping.

It’s begun.