Market volatility has had a huge impact
It’s no secret that property values across many Canadian markets have fluctuated dramatically in recent years – and that unpredictability is presenting plenty of challenges for homebuyers in the preconstruction home sector.
That’s because as closing nears an appraiser may deem the home to be worth significantly less than the agreed mortgage value from two or more years ago, potentially leading lenders to whittle down the loan amount and leaving the buyer in the lurch as they scramble to make up the difference.
In the Greater Toronto Area (GTA), where prices have been on an unpredictable ride amid the pandemic-era housing boom and subsequent cooldown, that problem is particularly pronounced, according to a mortgage broker based in the city.
Mandeep Khaneka (pictured top), of Clear Trust Mortgages, told Canadian Mortgage Professional that the trend had been growing across property types in the city, from condos to detached homes. “I think those valuations have been very challenging just because rates have gone up,” he said.
“Someone in the neighbourhood with a similar home sold for much cheaper has really thrown off the market, where now appraisers are not appraising that home for what the person has purchased for – just because there’s something similar selling for much cheaper.”
What can brokers advise clients whose appraisal comes in low?
Ominously for brokers, the list of possible solutions for their client is a short one. There’s little getting around the fact that the borrower will need to cough up the extra money if there’s a shortfall between the purchase price and appraised value, and even a short-term private option isn’t always available.
Housing affordability in Canada has plummeted to its worst level in a generation, with current supply unable to meet burgeoning demand, the International Monetary Fund (IMF) has said.https://t.co/OuT3YqMJFI
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 17, 2024
When the borrower doesn’t have another home to use for collateral in a private mortgage, those loan types are usually off the table. “Even privates are very hesitant in going up to extreme high loan to values,” Khaneka said. “If the valuation is not coming up, unfortunately what it leaves [the borrower] with is either they go back to the builder and try to negotiate a price or get an extension, or reach out to friends and family for an extra downpayment.”
In Toronto’s condo market, sales have plummeted over the last year – dropping by 29% in June compared with the same month in 2023, according to latest figures – with a flood of new inventory likely to continue weighing down on prices.
Until the market shakes off some of the imbalance it’s faced in recent years, that challenging outlook on the appraisals front is likely to continue, according to Khaneka.
He said that requesting family assistance is often one of the only avenues available to buyers whose appraisal comes up short. Many borrowers, he said, “are not able to close or they have to essentially resort to getting money from anyone – friends, family – to just help them save,” he said. “And it’s not a comfortable conversation on any front.”
Interest rate hikes helped pour cold water on red-hot market
Climbing interest rates have also had a big impact on market activity and the mortgage amount borrowers can qualify for. The advent of the COVID-19 pandemic saw rates plunge as the economy ground to a halt and public health measures gripped the country, causing scores of would-be buyers to step off the sidelines and avail of those record-low borrowing costs.
But as inflation spiked – hitting a 39-year high of 8.1% in the middle of 2022 – the Bank of Canada embarked on an aggressive spate of rate hikes, moving its benchmark rate higher by 475 basis points and dramatically squeezing the purchasing power of many Canadians.
The central bank finally cut rates in June, with further moves potentially on the way during the remainder of the year. A more balanced and normal market would be a welcome development, Khaneka said, after the volatility of recent years.
Many buyers during the pandemic “were saying, ‘OK, someone’s bought for this – I’m going to go ahead and buy too,’” he said. “And two years later, three years later, now the market’s completely turned and they never saw that coming – and neither did most people.
“We didn’t know that the rates were going to go that high and now in such a short period of time that they did increase, it has really [had] a rippling effect on the economy, especially with people who had purchased at that time. So it’s unfortunate, but again – lessons learned. And I’m hoping that it’s gotten us to a point where it’ll stop a little bit of the speculation play in the market.”
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