The Magic Money Tree

The magic money tree was ripe for the picking this week, as both the federal and provincial Governments have promised free handouts for those in need. I’m not going to lie, its a little bit overwhelming trying to keep up with all these policies and who qualifies, etc. Although this was all very predictable, as I had outlined the likely policy moves a few weeks ago. First we have the Federal Government announcing that people who have been laid off, sick, or self-employed can receive up to $2,000/month for four months under a new emergency response benefit. This comes on top of the BC provincial Governments pledge to mail out $1,000 cheques to residents who are out of work due to the virus. It will support EI-eligible workers as well as those who may not qualify for EI. As much as these programs are needed, one can’t help but shudder over the thought of free money, and the societal consequences this will create. These debts will never be paid off, and will ultimately be monetized by our central bank overlords. Fun fact, the Bank of Canada announced a new program to support provincial funding markets. In other words, the Bank will purchase up to 40% of all provincial bonds in order to help fund all these free money programs. Last but not least, the BC Government is suspending all tenancy evictions and rent increases. No landlord will be able to evict their tenants during these difficult times, rent increases are also forbidden. While this is a kind gesture, it basically gives tenants the green light to not pay their monthly rent. Paying rent has effectively become an honour system. If you can’t afford it, the BC Government will cut a cheque for $500 directly to the landlord. Obviously that won’t be enough to offset lost rent for the landlord. However, the hope is that landlords work with their banks to defer mortgage payments for up to 6 months. Yes, rental properties do qualify for the mortgage deferral program, although it is still on a case by case basis. You essentially have to prove to the bank that you can’t cover the mortgage payments. From what I understand, banks will review your bank accounts balances to determine if you have enough money or not. I suspect this is could really put some mom & pop investors under severe stress. I’m not sure a lot of them have enough of a rainy day fund to cover lost rent payments. Remember, property taxes and strata fees still have to be paid even if the mortgage gets deferred. This is kind of a perfect storm that could trigger investors to dump these rental units on the market for sale. This is a massively deflationary shock. Having tenants not paying rents, forcing landlords to miss mortgage payments feeds into a potentially ugly deleveraging of debts- which ultimately hits the banks. This is becoming widespread in the commercial market, where massive retailers have warned landlords they plan to withhold or reduce rental payments after closing stores because of the virus. This has prompted a wave of emergency sales and margin calls for some REITs. The economy was simply not designed to be placed on pause. How things shake out once we eventually come out the other side is anyone’s guess.