Borrowed money led to a boom in pre-construction sales. It could become a problem
Wednesday Jan 31st, 2024
Amidst the surge in real estate activity driven by historically low interest rates during the pandemic, particularly in the pre-construction market across Canada, a concerning trend has emerged. Doug Hoyes, an insolvency trustee at Hoyes, Michalos & Associates Inc., highlights a "double whammy" effect contributing to difficulties faced by an increasing number of homebuyers in finalizing their purchases.
As interest rates, which were lowered to 0.25% by the Bank of Canada in 2020 to stimulate the economy, gradually return to more traditional levels, buyers are now encountering challenges in qualifying for higher mortgages in 2024, according to Hoyes.
Hoyes emphasizes the impact of this scenario, stating, "If the real estate market picks up, everything's fine. If there's a shortfall, (the builder) is coming after you." Many buyers who initially placed deposits with borrowed money are now grappling with the need to secure additional funds to complete their transactions.
The issue is compounded by appraisal rates, especially for properties purchased as investments or speculation. Buyers assumed that property values would continue to rise, as has been the trend for the past decade. However, with some facing a "double whammy" of problems, they find themselves struggling to qualify for mortgages based on both their income and the current property values.
Hoyes anticipates potential challenges for developers as well, suggesting that if interest rates remain high or if the housing market softens with falling appraisal rates, builders may encounter difficulties in selling properties that buyers have abandoned. This could lead developers to pursue buyer deposits, potentially triggering a cycle of bankruptcies.
Highlighting the interconnectedness of the situation, Hoyes notes, "Let's face it, they also use borrowed money to build these." The evolving landscape poses uncertainties for both buyers and developers, signaling potential troubles ahead for the real estate industry in Canada.