Real estate downturn sparks buyers’ remorse

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The rapid downturn in Canada’s housing market is restoring a sense of calm to buyers who no longer need to fear being sucked into the whirling vortex of bidding wars. But now that prices are sliding, some buyers regret the outlandish bids they made during the early spring frenzy.

Claire Fan, economist at Royal Bank of Canada, says demand is cooling fast in cities across the country, pushing markets that once favoured sellers into a more balanced zone.

Ms. Fan notes that the slowdown in June was particularly acute in areas where markets were strongest – and prices were highest – during the pandemic.

In Toronto and Vancouver, consumers have proven more sensitive to the Bank of Canada’s early interest rates increases because average home prices are richer and mortgages are larger, she points out.

In June, new listings remained fairly robust while demand plunged, Ms. Fan says, and that pushed the sales-to-new-listings ratio lower for all regions.

East of Toronto, Durham Region has seen dizzying price jumps in the past couple of years. Detached houses in family-friendly communities were relatively affordable at the start of the pandemic. Now “days on market” are rising and price cuts are common. The swift turnabout is unnerving some sellers.

Shawn Lackie, agent with Coldwell Banker R.M.R. Real Estate, says buyers had 1,414 active listings to choose from last month compared with the unusually light inventory of 712 in June of 2021.

“The buyers are now sitting there saying, ‘hey we got the hammer back,’” Mr. Lackie says.

His advice to sellers coming to the market now is to be patient and work with any offers they get.

“Your first offer is typically your best offer,” he says “Even if it has conditions, work with them.”

Buyers these days are often making offers conditional on home inspections and financing. That gives them a few days to iron out wrinkles before the deal firms up – or back away entirely.

Mr. Lackie now routinely has a lawyer look over every deal.

“It’s just common sense. If something goes sideways, at least we’ve got counsel involved from the start.”

The Durham market reached a pinnacle in February, when the average price hit $1,228,990. In June the average price had fallen about 20 per cent to $972,354.

Some doleful buyers these days are asking for an abatement in price to reflect the current market, says Mr. Lackie, adding that the sellers must then decide if they will renegotiate.

Mr. Lackie says houses listed in February and March with asking prices of $799,000 in the Courtice area were routinely selling for between $1.15-million and $1.2-million as buyers lobbed bids $300,000 to $500,000 above the asking price.

Now buyers approaching the closing date for a property they bought in the spring can see average prices in the area have tumbled. If they estimate the price of the house they agreed to purchase has dropped by $260,000, for example, they might be tempted to forfeit the $60,000 deposit they gave and walk away, Mr. Lackie says.

In that scenario, the sellers will likely put the house back on the market. If they end up selling for less, they may pursue legal action against the original buyer.

In many cases, sellers are better off to agree to the compromise on price and move on, he advises.

Mr. Lackie points out that litigation will likely take two years or more and some sellers know they are still way ahead, even after they agree to reduce the price.

“Common sense has to get in there and push greed away,” he says. “Then the buyer can say ‘I didn’t get totally fleeced.’”

Another hurdle can arise if the value of a property has dipped since the offer date and the buyer needs a mortgage. If the lender requires an appraisal and the value comes in below the sale price, the buyer must close the gap.

“You’ve got to come up with another $300,000 because the bank’s sure not going to front you,” Mr. Lackie says. “That’s when the scramble starts.”

In many cases, young buyers make another visit to the “bank of mom and dad” he says.

Mr. Lackie expects the market to remain fairly quiet over the summer, with another bump in listings in September. He predicts a portion of those will come from people who moved to the suburbs during the pandemic but no longer want to commute. Another fraction will be homeowners who are financially stressed with the rise in interest rates.

Looking ahead, Ms. Fan at RBC cautions that further headwinds will come as the Bank of Canada presses on with rate hikes.

Ms. Fan says the central bank’s increases will likely cause housing affordability to continue to erode, put more buyers on the sidelines, and push prices lower.

Farrell Macdonald, broker at Atelier Realty, concentrates his business in Toronto and Ottawa, where he is doing a lot more upfront work than usual as buyers and sellers try to make sense of the current market.

For buyers, fear of missing out has given way to fear of buying in a falling market.

Mr. Macdonald, a former accountant, says consumers are wary of rising inflation for everyday items and the concomitant bump in interest rates.

“Unless you don’t eat or drive, it’s impossible not to notice,” he says.

To Mr. Macdonald the dramatic rise in house prices during the pandemic was mind-boggling.

“We saw this race to buy more house and more yard and maybe even a pool.”

People moved to the suburbs where they could find that large backyard, and now areas such as York Region in the 905 area code have cooled off dramatically.

In King Township, for example, the average price dropped to $2.083-million in June from $3.218-million in February as months of inventory swelled to 2.3 from 2.0 over that time. Only 21 properties changed hands in King in June compared with 86 new listings.

As prices fall, Mr. Macdonald has seen some collateral damage during the transition. One couple, for example, planned to sell their house in the Toronto area and move to Ottawa.

Their agent advised them to sell first and then look for the new property, but they did the reverse.

After buying in the Ottawa area at the height of the market in February and selling in the sagging GTA two-and-a-half months later, they have delayed their plans to retire, he says.

When it comes to sellers, Mr. Macdonald is delving into their motivation in trading properties.

“The cost and grief of going through a move is particularly relevant,” he says.

Sellers leaving Toronto for a smaller centre are able to go through with their plans if they’ve owned the house for several years, he says. Even if they sell for less than the property would have fetched earlier this year, they’ve usually locked in some gains, he says.

“Nobody I’m speaking to is expecting a February price.”

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